Until 1999, the Indian corporates' access to equity capital had been confined to the domestic capital market. In this year, for the first time, Indian companies raised the equity from the Wall Street. The first company to have floated ADRs in 1999 was Infosys. Depositary receipts have emerged as a favored vehicle to access developed stock markets for many emerging market companies. India has been no exception. While several Indian companies issued depository receipts in the 1990's, only a few of these are listed in the US exchanges. The findings of earlier research studies suggest that Indian ADRs often enjoy large premia, indicating effective market segmentation between the two countries. The market prices of Indian shares and ADRs revealed huge differences, giving considerable scope for arbitrage. In 2002, introduction of the twoway fungibility of ADRs was an important step taken to increase liquidity and reduce arbitrage between the underlying securities and ADRs. In this paper, the authors study the return dynamics of exchange listed ADRs of Indian originthe factors that explain the movements of returns of ADRs, crossborder correlations between returns on ADRs and their underlying shares and the premium/discount on ADR prices after the introduction of the two way fungibility. The effect of the announcement of twoway fungibility on the returns on shares in Indian markets is also studied.

The notion of free markets will remain empty and rhetoric, unless companies are able to raise capital from anywhere in the world. An increasing number of developing countries are removing trade barriers, dismantling capital control, encouraging foreign investment, and opening up their economies. Global financial markets have undergone far reaching changes which stem from the following interrelated factorsprogressive deregulation of financial markets, internationalization of financial markets and introduction of a variety of instruments like ADRs, allowing more risk than normal and larger financial investments. Indian corporates' access to equity capital had been confined to domestic capital market until 1999. This year, for the first time, Indian companies raised equity from the Wall Street. Its success turned the ADR dream into reality. It was observed that these ADRs enjoy a considerable premium over their underlying stock price. According to Chakrabarthi (2001), it is particularly noteworthy, because during that period, the Indian market was open to foreign institutional investors and the existence of such a premium arbitrage opportunities. The introduction of the twoway fungibility in 2002 was an attempt to lessen the premium/discount and consequently, reduce the scope for arbitrage.

This paper is divided into eight sections. The present section is the introduction to the study. The next section gives a conceptual overview of ADRs. The third section provides a literature survey. The fourth section explains the concept of twoway fungibility. The fifth section describes the methodology adopted. The effects of twoway fungibility on ADR returns are analyzed in the sixth section. The seventh section examines the effect of the announcement of twoway fungibility on returns in the Indian stock market. The last section contains a summary of the entire paper.

Management Research Journal, Domestic Capital Market, Financial Markets, American Depositary Receipts, ADRs, Foreign Capital Markets, Morgan Trust Company, Global Depositary Receipts, Market Segmentation, Indian Companies, Foreign Institutional Investors, FIIs, Multiple Linear Regression, Indian Markets.