You are on page 1of 7

American Depositary Receipt (ADR)

An American Depositary Receipt (ADR) is a certificate that
represents shares of a foreign stock owned and issued by a U.S.
bank. The foreign shares are usually held in custody overseas, but
the certificates trade in the U.S. Through this system, a large
number of foreign-based companies are actively traded on one of
the three major U.S. equity markets (the NYSE, AMEX or Nasdaq).


Investors can purchase ADRs from broker/dealers. These
broker/dealers in turn can obtain ADRs for their clients in one of two
ways: they can purchase already-issued ADRs on a U.S. exchange,
or they can create new ADRs.

To create an ADR, a U.S.-based broker/dealer purchases shares of

the issuer in question in the issuer's home market. The U.S.
broker/dealer then deposits those shares in a bank in that market.
The bank then issues ADRs representing those shares to the
broker/dealer's custodian or the broker-dealer itself, which can then
apply them to the client's account.

A broker/dealer's decision to create new ADRs is largely based on

its opinion of the availability of the shares, the pricing and market
for the ADRs, and market conditions.

Broker/dealers don't always start the ADR creation process, but

when they do, it is referred to as an unsponsored ADR program
(meaning the foreign company itself has no active role in the
creation of the ADRs). By contrast, foreign companies that wish to
make their shares available to U.S. investors can initiate what are
called sponsored ADR programs. Most ADR programs are
sponsored, as foreign firms often choose to actively create ADRs in
an effort to gain access to American markets.
ADRs are issued and pay dividends in U.S. dollars, making them a
good way for domestic investors to own shares of a foreign
company without the complications of currency conversion.
However, this does not mean ADRs are without currency risk.
Rather, the company pays dividends in its native currency and the
issuing bank distributes those dividends in dollars -- net of
conversion costs and foreign taxes -- to ADR shareholders. When
the exchange rate changes, the value of the dividend changes.

For example, let's assume the ADRs of XYZ Company, a French

company, pay an annual cash dividend of 3 euros per share. Let's
also assume that the exchange rate between the two currencies is
even -- meaning one Euro has an equivalent value to one dollar.
XYZ Company's dividend payment would therefore equal $3 from
the perspective of a U.S. investor. However, if the euro were to
suddenly decline in value to an exchange rate of one euro per
$0.75, then the dividend payment for ADR investors would
effectively fall to $2.25. The reverse is also true. If the euro were to
strengthen to $1.50, then XYZ Company's annual dividend payment
would be worth $4.50.

ADRs give U.S. investors the ability to easily purchase shares in
foreign firms, and they are typically much more convenient and cost
effective for domestic investors (versus purchasing stocks in
overseas markets). And because many foreign firms are involved in
industries and geographical markets where U.S. multinationals
don't have a presence, investors can use ADRs to help diversify
their portfolios on a much more global scale

What is an American depositary receipt (ADR) or

a Global depositary receipt (GDR)?
An American depositary receipt (ADR) or global
depositary receipt (GDR) is a simple way for investors to invest in
companies whose shares are listed abroad.
The ADR or GDR is essentially a certificate issued by a bank that gives the
owner rights over a foreign share. It can be listed on a stock exchange and
bought and sold just like a normal share.

The holder of an ADR or GDR is entitled to all benefits such as dividends and
rights issues from the underlying shares. They are sometimes – but not
always – able to vote.

As you might expect from the name, an ADR is listed in the US. A GDR is
typically listed in London or Luxembourg. A depositary receipt where the
issuing bank is European will sometimes be called a European Depositary
Receipt (EDR), although this term is less common.

How ADRs work

For a real example, let’s look at ICICI Bank. This stock is listed in India and
isn’t available to most foreign investors.

However it has a depositary receipt issued in New York and traded on the
New York stock exchange, which almost anyone can buy.

The depositary receipt for ICICI is issued by Deutsche Bank. For each
depositary receipt in circulation, Deutsche Bank holds the equivalent number
of India-listed shares on behalf of the owners of the ADR.

One ADR or GDR does not always equal one share of underlying stock. And
with ICICI, the ADR actually represents two India-listed shares of ICICI and is
priced accordingly.
This is quite common and is done so that the price of the ADR is typical for the
market where it trades. Very low-priced shares may have each depositary
receipt backed by several shares

For very high-priced ones, each depositary receipt represents a fractional

claim on the underlying shares. For example, each Nintendo ADR in the US is
worth one-eighth of a Nintendo share in Tokyo.

The price of the depositary receipt should be equal to the price of the
underlying shares, adjusted for currencies. That’s because major institutional
investors can arbitrage between the price of the underlying share and the
price of the ADR/GDR if the relationship moves too far out of line.

However, in some special cases this may not be true – for example, in cases
where countries put limits on the maximum amount of a company’s shares
that can be owned by foreign investors.

If that limit has already been reached, the ADR may trade at a persistent
premium to the value of the underlying shares because it’s the only way that
foreign buyers can buy into that company. One persistent example of this is
HDFC Bank, another Indian bank with an ADR in New York.

The depositary bank that issues the ADR can charge a fee for the costs of
holding on to the shares that back the ADR and doing all the paperwork. This
is typically around US$0.01-0.03 per share per year.

Where the company pays dividends, this will usually be deducted from the
dividend before that is paid on to the ADR holder. Where the company does
not pay a dividend, the depositary bank will usually charge your broker who
holds the ADRs on your behalf. The broker will then usually pass those fees
onto you.

Sponsored versus unsponsored ADRs

The US allows several different types of ADR. It’s important to know the
difference, since they have different degrees of backing and support from the
company you are investing in.
Unsponsored ADRs are issued without a formal agreement between the
issuing bank and the foreign company – indeed, the company may have no
desire to see its shares listed abroad at all. They trade on the over-the-counter
Sponsored ADRs fall into three categories. All are supported by the
company, but with different levels of regulation.
Level I ADRs trade in the over the counter market. Reporting requirements
are very low – the company does not need to issue any reports in the US or
under US accounting standards. It must be listed on a foreign stock exchange
and issue a report in English in that country under local accounting rules.
Level II ADRs can trade on a stockmarket such as NYSE or Nasdaq. The
company must register with the Securities and Exchange Commission and
issue annual reports in the US to US accounting standards.
Level III ADRs are used by companies that don’t simply want to float their
shares abroad, but also to raise capital in the US market. Consequently, they
are regulated to a similar standard to US companies. They must issue a
offering prospectus, while all subsequent new releases made in their home
market must also be issued in the US to US standards.
However, bear in mind that just because a company officially complies with
US regulations, it does not mean that it as strongly regulated or as transparent
as you might expect from a developed-market company. And the fact that a
well-known accounting firm has signed off on the accounts is no guarantee
that they are accurate, as many scandals have demonstrated.

The distinction between unsponsored and sponsored depositary receipts

exists for markets outside the US. For example, in Germany a foreign
company’s shares may be listed on the Berlin-Bremen exchange without its
consent. The classification of sponsored ADRs into three levels is specific to
US regulatory system.

How to buy ADRs and GDRs

You should be able to buy major ADRs and GDRs listed in your local market
through your usual stock broker. There are stock brokers that won’t deal in
any, but that’s unusual these days. However, especially with GDRs, not all
discount brokers will offer less popular stocks, so in some cases you may
need to call around to find a broker that will carry out the trade.

If you’re looking to see what ADRs and GDRs are available worldwide, you
could search the listings in your local exchange or check the websites of any
foreign companies that interest you.

But a more convenient resource is the depositary receipt directory maintained

by BNY Mellon, one of the big global depositary banks. This allows you to
search for depositary receipts by country, company and place of listing.
However, not all ADRs and GDRs listed here are tradable by retail investors.
In particular, there is an option in US securities law to issue shares that are
intended only for certain investors and these are sometimes used for ADRs.

Rule 144-A shares are specifically only to be traded by institutions. Regulation

S shares cannot be traded by any US person and are intended for non-US
residents – in practice many are tradable by institutions only as well. (One
popular trick among stock scammers and boiler rooms is to sell unwary
investors Regulation S shares that have no active retail market and will be
impossible to sell at anything except a knockdown price.)

The result is that many ADRs and GDRs are not listed on any stock
exchange, are highly illiquid or are only traded in large blocks by institutions.
So the amount of depositary receipts that are listed, liquid and tradable by
retail investors is considerably less than the total outstanding stock of ADRs
and GDRs.

In addition, investors should take great care when investing in unsponsored

depositary receipts or any kind of unauthorised secondary listing of a foreign
company. The liquidity of these instruments is often very poor and it has no
official backing from the company.

What’s more, the ADR could be withdrawn at any time and you could be
waiting for some considerable time before the depositary sells the shares and
sends you the proceeds. And you may be hit with an unreasonably large
administration fee in the process. While a sponsored ADR can also be
withdrawn, it will typically be done in a more shareholder-friendly way than
with an unsponsored ADR.

Hence, even though a stock may have an ADR or GDR it may not be possible
or sensible to buy this. In general, only sponsored depositary receipts listed on
a recognised stock exchange with reasonably liquidity are a sensible
investment. In other cases, it may be best to investigate whether it’s possible
to buy the shares directly on its domestic exchange.
However, there are a significant number of good quality companies available
as ADRs and GDRs. They are an opportunity often overlooked by investors,
so it’s always worth checking whether this may be the simplest way to invest
in a company or country, especially if you have no desire to open brokerage
accounts around the world.