American Depository Receipt (ADR) Process

The domestic company, already listed in its local stock exchange, sells its shares in bulk to a
U.S. bank to get itself listed on U.S. exchange.
The U.S. bank accepts the shares of the issuing company. The bank keeps the shares in its
security and issues certificates (ADRs) to the interested investors through the exchange.
Investors set the price of the ADRs through bidding process in U.S. dollars. The buying and
selling in ADR shares by the investors is possible only after the major U.S. stock exchange
lists the bank certificates for trading.
The U.S. stock exchange is regulated by Securities Exchange Commission, which keeps a
check on necessary compliances that need to be complied by the foreign company.

Figure 1 ADR issue process

ADR Issue in India

The broad commercial steps involved in an ADR issue is as follows:
I. The Indian company would issue rupee-denominated equity shares to a depository
based in America.
II. A custodian in India would keep these shares in its custody.
III. The depository would issue dollar-denominated receipts or shares to foreign
investors, known as ADRs/ ADSs. It would also set the ratio between the ADRs
and the equity shares, i.e., one ADR is equal to how many equity shares. It could
be one, more or less than one equity share. It all depends upon the pricing of the
share in the Indian market. The objective is to so price the ADR that it does not
become very expensive and out of reach for the retail foreign investors.
IV. A public issue would be made of the ADRs in USA and elsewhere. The
investment bankers would organise road shows and try and market the issue to
institutional and retail foreign investors. The book building method is used for the
issue.
 V. The ADRs would be listed on a US stock exchange, e.g., Nasdaq or New Stock
Exchange.
VI. Foreign exchange fluctuation risk or gain is to the account of the foreign investors.
VII. For the company there is no burden of repayment or interest.

Figure 2 Flow of Transactions during the issue of ADR

VIII. The company would pay dividend to the depository in rupee terms but the
depository would distribute this dividend to the ADR holders in dollars.
IX. For the investors their point of contact would be the depository.
X. The Indian company would need to comply with the SEC requirements in terms of
compliance and accounting norms, such as US GAAP.
XI. The ADR holders may exercise their right to vote through the overseas depository
bank.