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Published by Saranya Vijayakumar

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Published by: Saranya Vijayakumar on Feb 17, 2010
Copyright:Attribution Non-commercial


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ADRs were primarily created to increase investment access to widely known and oftenmultinational companies. They are typically formed by a depository bank depositing ordinaryshares of a foreign company into a trust and issuing receipts of interest in the underlying shares ona domestic exchange. The bank will act as a custodian for the trust handling dividend distribution,currency exchange, proxies, tax reporting, and regulatory filings. It receives a management fee forthese services, either from the shareholders or the issuing company.Trading of ADRs occurs by brokers purchasing/selling outstanding ADRs in the domestic market,or on the foreign markets if no shares are available domestically. In the case of purchases in theforeign market, the broker then deposits the foreign shares with the bank in exchange for newlycreated ADRs. In the case of sales in the local market, the broker will cancel the ADR causing thedepository bank to sell the shares in the foreign market and deliver the proceeds in the invest
currency. Units in the trust are listed on large exchanges primarily in countries with developedcapital markets, as if they were shares of a company domiciled in the same country as theexchange. The listing company of the ADR must adhere to the same regulatory requirements anddisclosures as the other listed issuers on the exchange. In effect, shares of a foreign company can bepurchased on a U.S. stock exchange in the same manner as stock of a U.S. company.So why have the middlemen (trust)? Many investors do not have efficient means of diversifyinginto foreign companies because of the administrative and implementation issues. Often, trading inforeign markets is more expensive relative to U.S. exchange transaction costs, as well as difficult toexecute due to time zone differences. Also, foreign exchanges do not usually have the sameregulatory requirements that investors are familiar with here in the U.S., and custody of the assets iscostly. Currency exchanges will also have to be utilized in order to purchase ordinary shares of foreign companies. ADRs trade easily and pay dividends in U.S. dollars and settle through U.S.clearinghouses. These implementation barriers coupled with the desire of investors to diversifyinternationally created a market for underwriters of ADR trusts. There are also Global DepositoryReceipts (GDRs), International Depository Receipts (IDRs), and European Depository Receipts(EDRs), which accomplish the same benefits already stated but trade in one or more internationalmarkets.
ADRs are issued by a U.S. bank that functions as a depositary, having ADR being backed by aspecific number of shares in the non-U.S. company. ADRs can be traded on any of the US stockexchange (NYSE, NASDAQ, or AMEX) and over-the-counter. In the case of Rule 144A, they areprivately placed and traded. The same concept for ADR has been spread into other regions with thecreation of the global depositary receipts (GDRs), international depositary receipts (IDRs), andEuropean depositary receipts (EDRs), which are generally traded or listed in one or moreinternational markets. As of February 2005, this instrument is used by around 2,100 non- USissuers from approximately80 countries. About 500 of those ADRs are listed in the US exchanges.
The main advantage of buying an American Depositary Receipt rather than the foreignstock itself is the ease of the transaction.
ADRs are a great way to invest abroad without having to convert U.S. dollars to manydifferent currencies
Another advantage offered by an ADR is that if the foreign stock does pay dividends, theinvestment bank will convert the dividends to U.S. dollars and remit the payment to you. Inaddition, if the dividend is subject to foreign tax, the investment bank will withhold the taxso you dont have to worry about it
Therefore, if exchange rates were to move against you, it would hurt the value of yourADR. If you are considering investing in foreign stocks, ADRs should be part of yourinvestment decision; however, you should become familiar with all the risks associated withforeign investing before making an investment decision.
Provides a simple means of diversifying a company
shareholder base and accessingimportant U.S. market
Mayincrease the liquidity of the underlyingshares of the issuer
ADRs can be used as an equityfinancing tool in both M&A transactions and ESOPs for

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