• A depositary receipt (DR) represents an ownership interest in securities of a foreign issuer typically trading outside its home market. ADR is a tradable instrument, and the depositary receipts that are trading in the United States are known as American depositary receipts, or ADRs.
  • Depositary receipts that are traded in an international market outside the United States are known as global depositary receipts, or GDRs. Most depositary receipts are quoted and traded in US$ terms. There are some DRs that are traded in euros and pounds sterling.
  • Typically a bank issues depositary receipts and also functions as a depository and issuing agent for the same.
  • The depositary receipt is issued against the deposit of domestic ordinary shares in the bank’s custody account in the home market.
  • These shares continue to remain on deposit with the bank’s custodian until the depositary receipts are cancelled.
  • When the depositary receipt is returned to the bank that acts as the depository for cancellation, the depositary bank instructs its custodian to deliver the underlying local share as per the instructions received from the party delivering the depositary receipt.
  • Each depositary receipt is backed by a specified number of the issuer’s local shares, known as the depositary receipt ratio. The ratio is manipulated in such a way that the price of each DR falls in a competitive price range that is considered attractive to the issuer’s international peer group. The ratio of depositary receipt to underlying shares can be in whole numbers or fractions, depending upon the local share price.
  • There are several benefits of DRs to the issuers as well as the investors.
  • An American depositary receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks. They were first introduced to the financial markets in 1927.
  • The sponsor bank purchases a bulk lot of shares from a foreign company and then bundles the shares into groups for the purpose of reissuing the same in any of the American stock exchanges. The issuing company is required to provide detailed financial information to the sponsor bank.
  • Global depositary receipts are depositary receipts in Europe or other non-U.S. markets pursuant to Regulation S promulgated under the U.S. Securities Act of 1933. GDRs are listed on European stock exchanges such as London or Luxembourg.
  • A company can choose to combine its GDR offering with an ADR offering into the U.S. markets. Then the ADRs may be publicly listed on a U.S. exchange and offered to retail investors, or may be privately placed with qualified institutional buyers pursuant to Rule 144A.
  • There are basically three levels of ADRs that are available, each having its own merits and disadvantages. The issuing company will choose the level that fits best considering the other requirements.
  • Analyzing foreign companies involves further scrutiny than merely looking at the fundamentals. In fact there are innumerable risk factors that determine the value of the depositary receipts in addition to the performance of the company. Investors should be aware of those risks.
  • Restricted programs are those that are meant to be traded by only certain individuals. In the United States, the Securities Exchange Commission allows these types of issuance of shares as per Rule 144-A and Regulation S.

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