American Depository Receipt

Defined as anegotiable securitythat represents securities of a non-U.S.

company that trades in the U.S.financial markets. Shares of many non-U.S.
companies trade on U.S.stock exchangesthrough ADRs, which are
denominated and paydividendsin U.S. dollarsand may be traded like
regular shares of stock.
Types of ADRs
Unsponsored ADRs:

Unsponsored shares trade on theover-the-counter(OTC) market.

Are issued in accordance with market demand, and the foreign company has no
formal agreement with a depositary bank.
Often issued by more than one depositary bank. Each depositary services only the
ADRs it has issued.

Sponsored Level I ADRs ("OTC" facility):

Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued
Can only be traded on the OTC market and the company has minimal reporting
requirements with theU.S. Securities and Exchange Commission
The company must have a security listed on one or more stock exchange in a foreign
jurisdiction and must publish in English on its website its annual report in the form
required by the laws of the country of incorporation, organization, or domicile.

Sponsored Level II ADRs ("Listing" facility):

Level 2 depositary receipt programs are more complicated for a foreign

company
When a foreign company wants to set up a Level2 program, it must file a
registration statement with the SEC and is under SEC regulation
In addition, the company is required to file aForm 20-Fannually.
The advantage that the company has by upgrading their program to
Level2 is that the shares can be listed on a U.S. stock exchange.

Sponsored Level III ADRs ("offering" facility):

Level 3 American Depositary Receipt program is the highest level a foreign

company can sponsor.
Setting up a Level 3 program means that the foreign company is not only
taking steps to permit shares from its home market to be deposited into an
ADR program and traded in the United States; it is actually issuing shares
to raise capital.
Foreign companies with Level 3 programs will often issue materials that
are more informative and are more accommodating to their U.S.
shareholders because they rely on them for capital.
Foreign companies with a Level3 program set up are the easiest on which
to find information.

How ADRs Work?

For example, lets look at ICICI Bank. This stock is listed in India and isnt
available to most foreign investors.
However it has a depositary receipt issued in New York and traded on the
New York stock exchange.
For ICICI, ADR is issued by Deutsche Bank. For each ADR in circulation,
Deutsche Bank holds the equivalent number of India-listed shares on
behalf of the owners of the ADR
One ADR does not always equal one share of underlying stock. With
ICICI, the ADR actually represents two India-listed shares of ICICI and is
priced accordingly.
The price of the depositary receipt should be equal to the price of the
underlying shares, adjusted for currencies. Thats because major
institutional investors can arbitrage between the price of the underlying
share.
In some special cases this may not be true for example, in cases where
countries put limits on the maximum amount of a companys shares that
can be owned by foreign investors.
If that limit has already been reached, the ADR may trade at a persistent
premium to the value of the underlying shares because its the only way
that foreign buyers can buy into that company.
The depositary bank that issues the ADR can charge a fee for the costs
of holding on to the shares that back the ADR and doing all the
paperwork
Where the company pays dividends, this will usually be deducted from
the dividend before that is paid on to the ADR holder. Where the
company does not pay a dividend, the depositary bank will usually

Advantages of ADRs
Cost-effective
Diversification
More US exposure

Disadvantages of ADRs
Political Risk
Exchange Rate Risk
Inflationary Risk