AMERICAN DEPOSITORY RECEIPTS (ADR) & GLOBAL DEPOSITORY RECEIPTS (GDR)

Depository Receipts :
Depository Receipts are a type of negotiable (transferable) financial security, representing a
security, usually in the form of equity, issued by a foreign publicly-listed company. However,
DRs are traded on a local stock exchange though the foreign public listed company is not
traded on the local exchange.
Thus, the DRs are physical certificates, which allow investors to hold shares in equity of other
countries. . This type of instruments first started in USA in late 1920s and are commonly known
as American depository receipt (ADR). Later on these have become popular in other parts of
the world also in the form of Global Depository Receipts (GDRs). Some other common type of
DRs are European DRs and International DRs.
In nut shell we can say ADRs are typically traded on a US national stock exchange, such as the
New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly
listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs
are usually denominated in US dollars, but these can also be denominated in Euros.

How do Depository Receipts Created?

When a foreign company wants to list its securities on another countrys stock exchange, it can
do so through Depository Receipts (DR) mode. . To allow creation of DRs, the shares of the
foreign company, which the DRs represent, are first of all delivered and deposited with the
custodian bank of the depository through which they intend to create the DR. On receipt of
the delivery of shares, the custodial bank creates DRs and issues the same to investors in the
country where the DRs are intended to be listed. These DRs are then listed and traded in the
local stock exchanges of that country.

How do Depository Receipts Created?

When a foreign company wants to list its securities on another countrys stock exchange, it can
do so through Depository Receipts (DR) mode. . To allow creation of DRs, the shares of the
foreign company, which the DRs represent, are first of all delivered and deposited with the
custodian bank of the depository through which they intend to create the DR. On receipt of
the delivery of shares, the custodial bank creates DRs and issues the same to investors in the
country where the DRs are intended to be listed. These DRs are then listed and traded in the
local stock exchanges of that country.
What are ADRs :
American Depository Receipts popularly known as ADRs were introduced in the American

cfpmahesh@gmail.com

FMS

ISB & M

market in 1927. ADR is a security issued by a company outside the U.S. which physically
remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock
exchanges. In other words, ADR is a stock that trades in the United States but represents a
specified number of shares in a foreign corporation.
Thus, we can say ADRs are one or more units of a foreign security traded in American
market. They are traded just like regular stocks of other corporate but are issued /
sponsored in the U.S. by a bank or brokerage.
ADRs were introduced with a view to simplify the physical handling and legal technicalities
governing foreign securities as a result of the complexities involved in buying shares in foreign
countries. Trading in foreign securities is prone to number of difficulties like different prices
and in different currency values, which keep in changing almost on daily basis. In view of
such problems, U.S. banks found a simple methodology wherein they purchase a bulk lot of
shares from foreign company and then bundle these shares into groups, and reissue them
and get these quoted on American stock markets.
For the American public ADRs simplify investing. So when Americans purchase Infy (the
Infosys Technologies ADR) stocks listed on Nasdaq, they do so directly in dollars, without
converting them from rupees. Such companies are required to declqare financial results
according to a standard accounting principle, thus, making their earnings more transparent.
An American investor holding an ADR does not have voting rights in the company.
The above indicates that ADRs are issued to offer investment routes that avoid the expensive
and cumbersome laws that apply sometimes to non-citizens buying shares on local
exchanges. ADRs are listed on the NYSE, AMEX, or NASDAQ.

Global Depository Receipt (GDR): These are similar to the ADR but are usually listed on
exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S.
dollars. The first GDR was issued in 1990.

ADVANTAGES OF ADRs:
There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective
way to buy shares of a foreign company. The individuals are able to save considerable
money and energy by trading in ADRs, as it reduces administrative costs and avoids foreign
taxes on each transaction. Foreign entities prefer ADRs, because they get more U.S.

cfpmahesh@gmail.com

FMS

ISB & M

exposure and it allows them to tap the American equity markets.

The shares represented by ADRs are without voting rights. However, any foreigner can
purchase these securities whereas shares in India can be purchased on Indian Stock
Exchanges only by NRIs or PIOs or FIIs. The purchaser has a theoretical right to exchange
the receipt without voting rights for the shares with voting rights (RBI permission required)
but in practice, no one appears to be interested in exercising this right.
Some Major ADRs issued by Indian Companies :
Among the Indian ADRs listed on the US markets, are Infy (the Infosys Technologies ADR), WIT
(the Wipro ADR), Rdy(the Dr Reddys Lab ADR), and Say (the Satyam Computer ADS)
What are Indian Depository Receipts (IDR) :
Recently SEBI has issued guidelines for foreign companies who wish to raise capital in India by
issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed on
Indian stock exchanges in the form of depository receipts. Such IDRs will be created by a
Domestic Depositories in India against the underlying equity shares of the issuing company
which is incorporated outside India.
Though IDRs will be freely priced., yet in the prospectus the issue price has to be justified.
Each IDR will represent a certain number of shares of the foreign company. The shares will
not be listed in India , but have to be listed in the home country.
The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companies
and that too without the risk of investing directly which may not be too friendly. Thus, now
Indian investors will have easy access to international capital market.
Normally, the DR are allowed to be exchanged for the underlying shares held by the custodian
and sold in the home country and vice-versa. However, in the case of IDRs, automatic
fungibility is not permitted.
SEBI has issued guidelines for issuance of IDRs in April, 2006, Some of the major norms for
issuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit for the IDRs to be
issued by the Indian companies. Moreover, the minimum investment required in the IDR issue
by the investors has been fixed at Rs two lakh. Non-Resident Indians and Foreign Institutional
Investors (FIIs) have not been allowed to purchase or possess IDRs without special permission
from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good track
record with respect to securities market regulations and companies not meeting the criteria will
not be allowed to raise funds from the domestic market If the IDR issuer fails to receive
minimum 90 per cent subscription on the date of closure of the issue, or the subscription level
later falls below 90 per cent due to cheques not being honoured or withdrawal of applications,
the company has to refund the entire subscription amount received, SEBI said. Also, in case of
delay beyond eight days after the company becomes liable to pay the amount, the company
shall pay interest at the rate of 15 per cent per annum for the period of delay.

cfpmahesh@gmail.com

FMS

ISB & M