13/12/2019 American Depositary Receipt – ADR Definition

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American Depositary Receipt – ADR

REVIEWED BY ADAM HAYES | Updated Jun 9, 2019

What Is an American Depositary Receipt – ADR?

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. depository
bank representing a specified number of shares—or as little as one share—investment in a
foreign company's stock. The ADR trades on markets in the U.S. as any stock would trade.

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ADRs represent a feasible, liquid way for U.S. investors to purchase stock in companies
abroad. Foreign firms also benefit from ADRs, as they make it easier to attract American
investors and capital—without the hassle and expense of listing themselves on U.S. stock
exchanges. The certificates also provide access to foreign listed companies that would not be
open to U.S. investment otherwise.

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Introduction To American Depository Receipts ADRs

How Do American Depositary Receipts – ADRs -- work?

ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial
institution overseas. ADR holders do not have to transact the trade in the foreign currency or
worry about exchanging currency on the forex market. These securities clear through U.S.
settlement systems.

To offer ADRs a U.S. bank will purchase shares on a foreign exchange. The bank will hold the
stock as inventory and issue an ADR for domestic trading. ADRs list on either the New York
Stock Exchange (NYSE), American Stock Exchange (AMEX), or the Nasdaq, but they are also
sold over-the-counter (OTC).

U.S. banks require that foreign companies provide them with detailed financial information.
This requirement makes it easier for American investors to assess a company's financial
health.

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KEY TAKEAWAYS
An American depositary receipt (ADR) is a certificate issued by a U.S. bank that
represents shares in foreign stock.
ADRs trade on American stock exchanges.
ADRs and their dividends are priced in U.S. dollars.
ADRs represent an easy, liquid way for U.S. investors to own foreign stocks.

Types of ADRs
American depositary receipts come in two basic categories:

A bank issues a sponsored ADR on behalf of the foreign company. The bank and the
business enter into a legal arrangement. Usually, the foreign company will pay the costs
of issuing an ADR and retaining control over it. While the bank will handle the
transactions with investors. Sponsored ADRs are categorized by what degree the foreign
company complies with U.S. Securities and Exchange Commission (SEC) regulations and
American accounting procedures.
A bank also issues an unsponsored ADR. However, this certificate has no direct
involvement, participation or even permission from the foreign company. Theoretically,
there could be several unsponsored ADRs for the same foreign company, issued by
different U.S. banks. These different offerings may also offer varying dividends. With
sponsored programs, there is only one ADR, issued by the bank working with the foreign
company.

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One primary difference between the two types of ADRs is where investors can buy them. All
except the lowest level of sponsored ADRs register with the SEC and trade on major U.S.
stock exchanges. Unsponsored ADRs will trade only over-the-counter. Also, unsponsored
ADRs never include voting rights.

ADRs are additionally categorized into three levels, depending on the extent to which the
foreign company has accessed the U.S. markets:

Level I - This is the most basic type of ADR where foreign companies either don't qualify
or don't want to have their ADR listed on an exchange. This type of ADR can be used to
establish a trading presence but not to raise capital. Level I ADRs are found only on
the over-the-counter market have the loosest requirements from the Securities and
Exchange Commission (SEC) – and they are typically highly speculative. While they are
riskier for investors than other types of ADRs, they are an easy and inexpensive way for a
foreign company to gauge interest for its securities in the U.S.
Level II – As with Level I ADRs, Level II ADRs can be used to establish a trading presence on
a stock exchange, and they can’t be used to raise capital. Level II ADRs have slightly more
requirements from the SEC than do Level I ADRs, but they get higher visibility and trading
volume. 
Level III – Level III ADRs are the most prestigious of the three ADR levels. With these, an
issuer floats a public offering of ADRs on a U.S. exchange. They can be used to establish a
substantial trading presence in the U.S. financial markets and raise capital for the foreign
issuer. They are subject to full reporting with the SEC.

American Depositary Receipt Pricing and Costs

An ADR may represent the underlying shares on a one-for-one basis, a fraction of a share, or
multiple shares of the underlying company. The depositary bank will set the ratio of U.S.
ADRs per home-country share at a value that they feel will appeal to investors. If an ADR’s
value is too high, it could deter some investors. Conversely, if it is too low, investors may
think the underlying securities resemble riskier penny stocks.

An ADR's price usually parallels those of the company's stock on its home exchange. For
example, British Petroleum (BP) has an ADR, that trades on the NYSE. April 17, 2019, it closed
at $44.62. In this instance, each ADR represents six shares of BP. The real individual share
price is $7.43. In contrast, on the London Stock Exchange for the same closing, the
company's stock ended the day at 572 pence per share—about $7.46 in U.S. dollars.

Holders of ADRs realize any dividends and capital gains in U.S. dollars. However, dividend
payments are net of currency conversion expenses and foreign taxes. Usually, the bank

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automatically withholds the necessary amount to cover expenses and foreign taxes. Since
this is the practice, American investors would need to seek a credit from the IRS or a refund
from the foreign government's taxing authority to avoid double taxation on any capital gains
realized.

Pros
Cons
• Easy to track and trade
• Denominated in dollars • Could face double taxation

• Available through U.S. brokers • Limited selection of companies

• Offer portfolio diversification • Unsponsored ADRs may not be SEC-compliant

• Investor's may incur currency conversion fees

History of American Depositary Receipts—ADRs

Before American depositary receipts were introduced in the 1920s, American investors who
wanted shares of a non-U.S. listed company could only do so on international exchanges—an
unrealistic option for the average individual back then.

While easier in the contemporary digital age, purchasing shares on international exchanges
still have potential drawbacks. One particularly daunting roadblock is currency-exchange
issues. Another important drawback is in the regulatory differences between U.S. exchanges
and foreign exchanges.

Before investing in an internationally traded company, U.S. investors have to familiarize

themselves with the different financial authority's regulations, or they could risk
misunderstanding important information, such as the company's financials. They might also
need to set up a foreign account, as not all domestic brokers can trade internationally.

ADRs were developed because of the complexities involved in buying shares in foreign
countries and the difficulties associated with trading at different prices and currency values.
ADRs allow U.S. banks to purchase a bulk lot of shares from a foreign company, bundle the
shares into groups and reissue them on U.S. stock markets – namely, the New York Stock
Exchange and NASDAQ. J.P. Morgan’s (JPM) predecessor firm Guaranty Trust Co. pioneered
the ADR concept. In 1927, it created and launched the first ADR, enabling U.S. investors to
buy shares of famous British retailer Selfridges and helping the luxury depart store tap into
global markets. The ADR was listed on the New York Curb Exchange. A few years later, in
1931, the bank introduced the first sponsored ADR for British music company Electrical &
Musical Industries (also known as EMI), the eventual home of the Beatles. Today, J.P. Morgan
and another U.S. bank – BNY Mellon – continue to be actively involved in the ADR markets.

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Real-World Example of ADRs

Between 1988 and 2018, German car manufacturer Volkswagen AG traded OTC in the U.S. as
a sponsored ADR under the ticker VLKAY. Aug. 13, 2018, Volkswagen terminated its ADR
program. The next day, J.P. Morgan established an unsponsored ADR for Volkswagen, now
trading under the ticker VWAGY.

Investors who held the old VLKAY ADRs had the option of cashing out, exchanging the ADRs
for actual shares of Volkswagen stock—trading on German exchanges—or exchanging them
for the new VWAGY ADRs.

Related Terms
Depositary Receipt: What Everyone Should Know
A depositary receipt (DR) is a negotiable financial instrument issued by a bank to represent a foreign
company's publicly traded securities. more

Unsponsored ADR
An unsponsored ADR is an American depositary receipt (ADR) that a depositary bank issues without
the involvement, participation - or even the consent - of the foreign issuer whose stock underlies the
ADR. more

Sponsored ADR
A sponsored ADR is an American depositary receipt (ADR) that a bank issues on behalf of a foreign
company whose equity serves as the underlying asset. more

Y
Y is a letter that appears on a stock symbol specifying that a particular stock is an American
Depositary Receipt (ADR). more

Global Registered Share (GRS)

A global registered share (GRS, or Global Share) is a security that can be traded across multiple
countries, in multiple currencies. more

American Depositary Share (ADS) Definition

An American depositary share (ADS) is a U.S. dollar-denominated equity share of a foreign-based
company available on an American stock exchange. more

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