Depository Receipts

 | October 23,2013 04:58 pm IST

An Overview of Depositary Receipts
Depositary Receipts (DRs), which include ADRs, GDRs, Euro DRs and NYSs, are negotiable US securities that generally represent a non-US company's publicly traded equity. Although typically denominated in US dollars, Depositary Receipts can also be denominated in Euros.

Depositary Receipts can be eligible to trade on all U.S. stock exchanges as well as on many European stock exchanges.

Global Depositary Receipts (GDRs), the former being issued and/or listed only in the US markets while the latter are simultaneously issued and/or listed in more than one market, typically in the European and US markets. ADRs can be classified as Unsponsored ADRs, Sponsored ADRs, Private Placement DRs and Global DRs, depending upon where they may be listed and traded, their purpose, and their registration and accounting requirements.

The increasing demand for Depositary Receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally in the most efficient manner possible. While most investors recognize the benefits of global diversification, they also understand the challenges presented when investing directly in local trading markets. These obstacles can include inefficient trade settlements, uncertain custody services and costly currency conversions. Depositary Receipts overcome many of the inherent operational and custodial hurdles of international investing. In fact, cost benefits and conveniences may be realized through Depositary Receipt investing, thus allowing those who invest internationally to achieve the benefits of global diversification without the added expense and complexities of investing directly in the local trading markets.

DR programmes were originally developed to enable US investors to invest internationally in the late 1920s and ADRs came into existence in their present form in 1955. The 1990s saw a spurt in the number of DR programmes, particularly from emerging economies whose governments introduced financial liberalisation measures to meet the increased need of capital. Prior to 1990, firms from developed markets dominated the DR market but firms from emerging markets now constitute a major chunk of listed and traded DR programmes. India has the maximum number of DR programmes among emerging markets. From April 1992 to June 2001, 72 Indian firms issued 85 DR programmes which were listed on the foreign markets.

Initially Indian firms listed their DR programmes on European exchanges due to their mild securities regulations and easy listing norms, but in the course of the 1990s, with improved levels of financial transparency, they could meet the stringent requirements of the US markets and started listing on them. While ADR listing Indian firms tend to be young, innovative and operate in knowledge-based industries, GDR listing Indian firms operate mostly in the traditional sectors of the economy.

Types of Depository Receipt

American Depository Receipt (ADR)
Certificates issued by a U.S. depository bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR "Unsponsored" ADRs do not receive such assistance. ADRs are subject to the same currency, political, and economic risks as the underlying foreign share. Arbitrage keeps the prices of ADRs and underlying foreign shares, adjusted for the SDR/ordinary ratio essentially equal. American depository shares (ADS) are a similar form of certification.

Global Depository Receipt (GDR)
A receipt denoting ownership of foreign-based corporation stock shares, which are traded in, numerous capital markets around the world.

Benefits to the Company
Currently, there are over 2,000 Depositary Receipt programs for companies from over 70 countries. The establishment of a Depositary Receipt program offers numerous advantages to non-U.S. companies. The primary reasons to establish a Depositary Receipt program can be divided into two broad considerations: capital and commercial.

Why Are They Issued?
They are a means for a foreign company to raise funds. Typically these foreign countries do not have well developed and accessible domestic financial markets. Once issued, these securities are listed on U.S. equity markets, giving these relatively unknown companies exposure both in terms of their products and future financing. Obviously, each exchange has their own rules and requirements about listing these companies.


Expanded market share through broadened and more diversified investor exposure with potentially greater liquidity, which may increase or stabilize the share price.
Enhanced visibility and image for the company's products, services and financial instruments in a marketplace outside its home country.
Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions.
Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in the parent company.

Benefits to an Investor
Increasingly, investors aim to diversify their portfolios internationally. However, obstacles such as undependable settlements, costly currency conversions, unreliable custody services, poor information flow, unfamiliar market practices, confusing tax conventions and internal investment policy may discourage institutions and private investors from venturing outside their local market.

Depositary Receipt Advantages

Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.
Diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market.
Elimination of global custodian safekeeping charges, potentially saving Depositary Receipt investors up to 10 to 40 basis points annually.
Familiar trade, clearance and settlement procedures.
Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash distributions.
Ability to acquire the underlying securities directly upon cancellation.