What is ADR and GDR American Depository Receipts and Global Depository Receipts

Indians are known world over for their regular savings habit. We have imbibed this very healthy habit from our forefathers who practiced it in their own way throughout their life, and lived a safe and satisfactory retired life due to this habit. In this generation too the same habit is widely prevalent. We invest in traditional savings like Bank Deposits, Mutual Funds, and many such avenues. The latest being, investments in stocks and shares. In the last two decades people investing and trading in stocks and shares of various companies that are listed in most of our stock exchanges that are spread across India, has become a regular means of earning extra income, or a means of creating savings in the near future. What if the companies whose shares are publicly traded in stock exchanges wishes to expand its fund raising capacities to opportunities to raise funds from people from other countries. This is where ADR and GDR come into picture.

What is ADR
ADR is the full form of American Depository Receipts. This is the recent method adopted by many large and well respected companies from India to raise funds from American Markets.

How ADR Operates

Indian companies have direct access to raise funds from Indian public by way of issuing Shares, Debentures etc. However Indian companies cannot do so, in such a direct manner, when it comes to raising funds from American people. That would entail the Indian companies to adopt US Accounting Norms which is also called as GAAP, maintain accounting practices as per American Financial Year (Which starts in January and ends in December of any particular year), as also follow variety of stringent standards as per American norms. Effectively, it would mean that the Indian company would have to follow two different set of rules simultaneously, one to comply with the laws of Indian Companies Act, and the other to comply with the American Laws. The method to circumvent the American norms, but still raise funds from American people is available by way of ADR or American Depository Receipts. In this system, the Indian company deposits certain amount of its Indian shares with designated American Banks. The banks, in turn, issues receipts that are equivalent in values (And also based on the intrinsic value the Indian Companys shares would fetch in the American market) to the Indian Company. These receipts essentially would be in number of receipts. Then these Indian Companies can trade these ADRs or American Depository Receipts with the American public. These ADRs can be purchased and traded freely without any encumbrances in the American Stocks and Shares Market. This way the Indian company is able to enter into the American Stocks and Shares market, and raise funds from the American public. The role of the American bank which has issued these receipts is very crucial, since it is they who stand guarantee to the issued receipts. Hence they do exhaustive study of the Indian company from all perspectives, and only then issue the ADR to the Indian company.

What is GDR and how it operates

The full form of GDR is Global Depository Receipt. It is not a different financial instrument, as it may sound, from that of ADR. In fact if the Indian Company which has issued GDRs in the American market wishes to further extend it to other developed and advanced countries such as Europe, then they can sell these ADRs to the public of Europe and the same would be named as GDR.

Indian Companies with ADR & GDR

There are quite a lot of successful Indian companies that have now issued ADRs and GDRs. Some such companies are given underneath.

Dr. Reddys HDFC Bank ICICI Bank Infosys Technologies MTNL VSNL WIPRO

What is American Depository Receipt (ADR) and Global Depository Receipt (GDR)?
This article explains what ADRs and GDRs are, and how they can be used by Non Resident Indians (NRIs) and non-Indians for making investments in India. India is hot these days all major brokerages are of the opinion that India has a great long term potential, and that investors in India would reap handsome benefits in the next 10 years. With the current correction in the Indian stock market, the valuations have become even better. And the logic of investing in Indian equity market has become even more compelling. This is great for people living in India they can invest in various mutual funds (MFs), or can choose some great companies and invest in those. (Confused if you should invest in stocks directly or through mutual funds? Please read Direct investment in Stocks versus Mutual Funds (MFs)?) But what about Non Resident Indians (NRIs) and foreign nationals? Considering the many restrictions on NRIs and foreign nationals investing in India, how can they benefit from the potential that India offers? There are some very good proxies to investing directly in India and ADRs and GDRs are a great option.

What is an ADR / GDR?

ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Lets understand these better. Every publicly traded company issues shares and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc.

These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation). But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchangesdirectly. But many good companies get listed on these stock exchangesindirectly using ADRs and GDRs. This is what happens: The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4). These receipts are then sold to the people of this foreign country (and anyone who is allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. These receipts, which are traded like ordinary stocks, are calledDepository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares that is, it stores the shares on behalf of the receipt holders.

What is the difference between ADR and GDR?

Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.

How can you use an ADR / GDR?

ADRs and GDRs are not for investors in India they can invest directly in the shares of various Indian companies. But the ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying these, they can invest directly in Indian companies without going through the hassle of understanding the rules and working of the Indian financial market since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy these using their regular equity trading accounts!

Which Indian companies have ADRs and / or GDRs?

Some of the best Indian companies have issued ADRs and / or GDRs. Below is a partial list. Company Bajaj Auto Dr. Reddys HDFC Bank Hindalco ICICI Bank Infosys Technologies ITC L&T MTNL Patni Computers Ranbaxy Laboratories Tata Motors State Bank of India VSNL WIPRO ADR No Yes Yes No Yes Yes No No Yes Yes No Yes No Yes Yes GDR Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes Yes Yes