Sponsored DR issue

When an Indian company's shares are made available abroad as ADRs, GDRs or IDRs, the underlying shares that back those receipts have to come from somewhere. There are two routes: the company can issue fresh shares against which the DRs are created, or it can arrange for the shares to be acquired from its existing shareholders. The second route is a sponsored issue.

In a sponsored DR issue, the shares that will back the depository receipts are acquired from existing shareholders and delivered to the local custodian of the depository bank. This differs from the alternative, where the company simply issues fresh shares against which the DRs are created.

Either way, the mechanics that follow are the same: the company appoints a depository bank to hold the underlying shares and issue the DRs against them; once the custodian confirms receipt of the shares, the foreign depository bank issues the depository receipts to brokers for trading on the chosen overseas exchange.

Himalaya Pharma Ltd wants to list depository receipts on the New York Stock Exchange (which would make them ADRs).

Route 1 — sponsored issue. The company approaches a group of existing large shareholders and arranges to acquire, say, 50 lakh of their existing shares. These are delivered to the local custodian of the depository bank, which then issues ADRs against them. No new shares are created; the company's total issued capital is unchanged, and the selling shareholders receive proceeds directly, much as in an offer for sale.

Route 2 — the alternative. Instead, Himalaya Pharma could issue 50 lakh fresh shares directly against which the ADRs are created — in that case its issued capital rises by 50 lakh shares, and the company itself receives the proceeds, much as in a fresh issue.

Each ADR still represents a fixed number of underlying shares, and holders get dividend and capital-appreciation rights on the underlying shares but not voting rights, regardless of which route created the pool of shares behind the receipts.

Chapter 4, section 4.3 (Depository Receipts), in the list of steps for issuing DRs. Expect the sponsored/fresh-issue distinction tested directly, and possibly cross-referenced against the fresh-issue-versus-offer-for-sale distinction the workbook draws for domestic public issues in an earlier chapter.

• Sponsored means shares are acquired from existing shareholders, not that the company itself "sponsors" or promotes the issue in a general marketing sense.
• A sponsored issue does not change the company's issued capital; a fresh-share DR issue does, in the same way an offer for sale versus a fresh issue affects issued capital differently in a domestic IPO.
• DR holders never get voting rights, whether the DRs were created through a sponsored or a fresh-share route — only dividend and capital appreciation pass through.
• Do not confuse this with a sponsored ETF or sponsored AMC concept elsewhere in the glossary — "sponsored" here is specific to how the underlying shares behind a DR were sourced.