Depository Receipt Explained: ADR vs GDR

depository receipt ADR GDR

A depository receipt (DR) is a negotiable certificate denominated in US dollars. It represents a non-US company’s publicly traded, local currency (Indian Rupee) shares. Depository receipts are created when the local currency shares of a Domestic Company are delivered to the depository’s local custodian bank, against which the depository bank issues DRs in US dollars. ┬áThese DRs may trade freely in the overseas markets like any other dollar denominated security, either on a stock exchange or in the over-the-counter market or among a restricted group such as Qualified Institutional Buyers (QIB). Dividend payments are made by the company in rupees which the depository converts into dollars and pays to the investor after deducting the withholding tax

Characteristics of Depository Receipt

  • It is a negotiable instrument
  • It is denominated in foreign currency, generally in US Dollar
  • It is freely tradable on stock exchange or over the counter

Parties involved in Depository Receipt

  • Issuer Company: The company that plans to raise capital from foreign market
  • Custodian Bank: It is a banking company that acts as custodian of shares or FCCB against which DR is issued. Also called Domestic Custodian Bank
  • Depository Bank: It is a bank authorized by Issuer Company to issue DR. It prepares and issues DR. It appoints Custodian. It acts as intermediary between the investors and the issuing company
  • Foreign Stock Exchange: The exchange where DRs are traded
  • Investor: Investor is a person/entity who want to make investment in foreign companies

American Depository Receipt (ADR)

ADR’s are depository receipts issued in United States of America (USA) in accordance with the provisions of Securities and Exchange Commission. Listing provisions in USA are very stringent. Issue of ADR is costlier. ADRs are US dollar denominated negotiable instruments issued in the US by a depository bank, representing ownership in non-US securities. ADRs can be listed on New York Stock Exchange, American Stock Exchange or NASDAQ. Depository receipts permit investors to trade in foreign securities and at the same time giving the issuing companies an access to major international markets

Global Depository Receipt (GDR)

GDRs are traded and settled outside the United States. Rule 144A of the Securities and Exchange Commission (SEC) of U.S.A., however, permits the companies from outside USA to offer their GDRs to Qualified Institutional Buyers (QIB). Global Depository Receipt is in the nature of a depository receipt or certificate created by an overseas depository bank (authorised by the issuing company) outside India and is issued to non-resident investors against the issue of FCCB’s or shares of the issuer company. It is a negotiable certificate in US dollars, and traded freely in foreign markets like other securities and can be issued by way of private placement also. Prior permission of Ministry of Finance, Government of India, is required for issue of GDRs.

Advantages of Depository Receipt

  • It provides an easier option for companies to expand their equity base outside their home market. Thus, it is a capital-raising tool to access capital overseas
  • It provides global visibility to the company and boosts its reputation in local market
  • It provides easier option for investors to invest in foreign companies with any hustle of regulatory requirements

How Depository Receipt issued in India?

  • First, a board resolution has to be passed to adopt the issue
  • An application is then made to the Ministry of Finance.
  • The approval from the Ministry only specifies the price range at which the issue is to be made
  • A prospectus, called the red herring is prepared
  • Prospectus leaves a blank space for the issue price. Pricing is finalised only at the last stage
  • The underwriter then markets the issue by organising roadshows
  • Shares are issued by the Company to the depository but delivered to the custodian

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