ADR and GDR. What is ADR? ADR stands for American Depository Receipt. What is GDR?

GDR stands for Global

Depository Receipts

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AMERICAN DEPOSITORY RECEIPTS (ADR) & GLOBAL

DEPOSITORY RECEIPTS (GDR)
Depository Receipts :
Depository Receipts are a type of negotiable (transferable) financial security,
representing a security, usually in the form of equity, issued by a foreign publicly-listed
company. However, DRs are traded on a local stock exchange though the foreign public
listed company is not traded on the local exchange.
Thus, the DRs are physical certificates, which allow investors to hold shares in equity
of other countries. . This type of instruments first started in USA in late 1920s and are
commonly known as American depository receipt (ADR). Later on these have become
popular in other parts of the world also in the form of Global Depository Receipts
(GDRs). Some other common type of DRs are European DRs and International DRs.
In nut shell we can say ADRs are typically traded on a US national stock exchange, such
as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs
are commonly listed on European stock exchanges such as the London Stock Exchange.
Both ADRs and GDRs are usually denominated in US dollars, but these can also be
denominated in Euros.
How do Depository Receipts Created?
When a foreign company wants to list its securities on another countrys stock exchange,
it can do so through Depository Receipts (DR) mode. . To allow creation of DRs, the
shares of the foreign company, which the DRs represent, are first of all delivered and
deposited with the custodian bank of the depository through which they intend to create
the DR. On receipt of the delivery of shares, the custodial bank creates DRs and issues
the same to investors in the country where the DRs are intended to be listed. These DRs
are then listed and traded in the local stock exchanges of that country.
What are ADRs :
American Depository Receipts popularly known as ADRs were introduced in the
American market in 1927. ADR is a security issued by a company outside the U.S.
which physically remains in the country of issue, usually in the custody of a bank, but is
traded on U.S. stock exchanges. In other words, ADR is a stock that trades in the United

States but represents a specified number of shares in a foreign corporation.

Thus, we can say ADRs are one or more units of a foreign security traded in American
market. They are traded just like regular stocks of other corporate but are issued /
sponsored in the U.S. by a bank or brokerage.
ADRs were introduced with a view to simplify the physical handling and legal
technicalities governing foreign securities as a result of the complexities involved in
buying shares in foreign countries. Trading in foreign securities is prone to number of
difficulties like different prices and in different currency values, which keep in changing
almost on daily basis. In view of such problems, U.S. banks found a simple
methodology wherein they purchase a bulk lot of shares from foreign company and then
bundle these shares into groups, and reissue them and get these quoted on American stock
markets.
For the American public ADRs simplify investing. So when Americans purchase Infy (the
Infosys Technologies ADR) stocks listed on Nasdaq, they do so directly in dollars,
without converting them from rupees. Such companies are required to declqare financial
results according to a standard accounting principle, thus, making their earnings more
transparent. An American investor holding an ADR does not have voting rights in the
company.
The above indicates that ADRs are issued to offer investment routes that avoid the
expensive and cumbersome laws that apply sometimes to non-citizens buying shares on
local exchanges. ADRs are listed on the NYSE, AMEX, or NASDAQ.
Global Depository Receipt (GDR): These are similar to the ADR but are usually
listed on exchanges outside the U.S., such as Luxembourg or London. Dividends are
usually paid in U.S. dollars. The first GDR was issued in 1990.
ADVANTAGES OF ADRs:
There are many advantages of ADRs. For individuals, ADRs are an easy and cost
effective way to buy shares of a foreign company. The individuals are able to save
considerable money and energy by trading in ADRs, as it reduces administrative costs
and avoids foreign taxes on each transaction. Foreign entities prefer ADRs, because they
get more U.S. exposure and it allows them to tap the American equity markets. .
The shares represented by ADRs are without voting rights. However, any foreigner can
purchase these securities whereas shares in India can be purchased on Indian Stock
Exchanges only by NRIs or PIOs or FIIs. The purchaser has a theoretical right to
exchange the receipt without voting rights for the shares with voting rights (RBI
permission required) but in practice, no one appears to be interested in exercising this
right.

Some Major ADRs issued by Indian Companies :

Among the Indian ADRs listed on the US markets, are Infy (the Infosys Technologies
ADR), WIT (the Wipro ADR), Rdy(the Dr Reddys Lab ADR), and Say (the Satyam
Computer ADS)
What are Indian Depository Receipts (IDR) :
Recently SEBI has issued guidelines for foreign companies who wish to raise capital in
India by issuing Indian Depository Receipts. Thus, IDRs will be transferable securities
to be listed on Indian stock exchanges in the form of depository receipts. Such IDRs will
be created by a Domestic Depositories in India against the underlying equity shares of the
issuing company which is incorporated outside India.
Though IDRs will be freely priced., yet in the prospectus the issue price has to be
justified. Each IDR will represent a certain number of shares of the foreign company.
The shares will not be listed in India , but have to be listed in the home country.
The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign
companies and that too without the risk of investing directly which may not be too
friendly. Thus, now Indian investors will have easy access to international capital
market.
Normally, the DR are allowed to be exchanged for the underlying shares held by the
custodian and sold in the home country and vice-versa. However, in the case of IDRs,
automatic fungibility is not permitted.
SEBI has issued guidelines for issuance of IDRs in April, 2006, Some of the major
norms for issuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit
for the IDRs to be issued by the Indian companies. Moreover, the minimum investment
required in the IDR issue by the investors has been fixed at Rs two lakh. Non-Resident
Indians and Foreign Institutional Investors (FIIs) have not been allowed to purchase or
possess IDRs without special permission from the Reserve Bank of India (RBI). Also, the
IDR issuing company should have good track record with respect to securities market
regulations and companies not meeting the criteria will not be allowed to raise funds from
the domestic market If the IDR issuer fails to receive minimum 90 per cent subscription
on the date of closure of the issue, or the subscription level later falls below 90 per cent
due to cheques not being honoured or withdrawal of applications, the company has to
refund the entire subscription amount received, SEBI said. Also, in case of delay beyond
eight days after the company becomes liable to pay the amount, the company shall pay
interest at the rate of 15 per cent per annum for the period of delay.