Depository receipts (DRs) is a negotiable instrument issued by a bank to represent a foreign company’s public traded securities. It represents ownership in a foreign firm and is traded in the markets of other countries in local market currencies. It trades on a local stock exchange. A bank deposits shares of the foreign firm and then issues receipts representing ownership of a specific number of the foreign shares. The depository bank acts as a custodian, and it manages stock splits, dividends, and other events. Although the investor is not required to convert to the foreign currency, the value of the DR is affected by exchange rate changes, and firm fundamentals, economic events, as well as any other factors that can affect the value of any stock. If the organization is involved with the issue, the depository receipt is a sponsored DR; otherwise, it is an unsponsored DR. A sponsored DR provides the investor voting rights and is usually subject to more significant disclosure requirements. In an unsponsored DR, the depository bank retains the voting rights.
Depository Receipt can be of following types.
- Global Depository receipt
- American Depository Receipt
- European Depository receipt
- Indian Depository receipt
An ADR goes through the following process before it is issued to the public
- The issuing bank in the US goes through the financials of the foreign company to know its strength of the Company for whose ADR is to be issued.
- The bank buys shares of a foreign Company.
- The shares are issued in lots.
- Each lot represents a typical ADR.
- A typical ADR is priced in dollars, and the dividends are also paid in dollars, making it easier for the American to invest.
- The Depository Bank acts as a custodian.
GLOBAL DEPOSITORY RECEIPTS
A Global Depository Receipt is a negotiable certificate issued by depository banks which represent a stock of shares of a company which can be listed and traded independently from the underlying shares. The GDR are used by companies from rising markets and sold to professional investors only.
The Global Depository Receipts can either be listed on the Main Market through a Standard Listing or on the Professional Securities Market. A GDR is usually transacted on two or more markets, namely the London and the US markets.
Each GDR is a representation of a particular number of underlying ordinary shares of an international company, which is kept in deposit with a custodian in the relevant home market. The GDR are always valued and traded in the denomination of U.S. dollars, the dividend payout is also in U.S. dollars and follows the trading and settlement procedures of the stock market in which they are traded and transacted
To float a GDR into the stock market, at first, the issuer has to appoint a team of advisors which includes investment bankers, lawyers, and accountants. Second, the issuer selects a bank to act as a depository bank that can manage the implementation of the program and can also perform the complex task of liaison among a range of parties to the transaction and can remain vital to the future development of the GDR program
The GDR is often introduced to raise capital, depending on whether the issuer aims to tap the private placement or public US markets.
Indian Depository Receipt (IDR)
An Indian Depository Receipt (IDR) is a financial instrument which is denominated in Indian currency Rupees issued in the form of a depository receipt by a Domestic Depository against the underlying equity shares of the issuer to enable foreign companies to raise funds from the Indian securities Markets. The custodian ‘Domestic Depository’ is mandatorily required to be registered with the Securities and Exchange Board of India (SEBI) which is a nodal regulator of the Indian Securities Market. The foreign company which wants to issue IDRs will deposit shares to an Indian depository, who would further issue receipts to investors in India against these shares. The benefit of the underlying shares (like a bonus, dividends, etc.) would accrue to the depository receipt holders in India. Standard Chartered PLC is the first company to issue Indian depository receipts (IDR) in India. SEBI has prescribed certain regulation for the issue of IDRs, and these regulations are contained in SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2009. It is mandatory on the part of issuer to abide by these regulations as noncompliance of any of these regulations would lead to massive penalties and even cancellation of the whole of the capital raising procedure.
The rules provide among other things for
- Eligibility criteria for issue of IDRs
- System for making an issue of IDRs
- Additional conditions for the issue of IDRs
- Registration of documents
- Stringent Conditions for the issue of prospectus and application
- Listing of IDRs on Indian Stock Markets
- Procedure for transfer and redemption
- Continuous Disclosure Requirements
European Depository Receipt (EDR)
European Depository Receipt is a financial instrument which is issued by a European bank, and that signifies securities which trade on exchanges outside of the bank’s home country. These securities are traded on the local exchanges and used by banks and issuing companies in the U.S. and other countries to attract investment capital from the European region. This depository receipt is sometimes known as “Euro Depository Receipts.” It is to be noted that the euro is not the only currency that can be used to issue EDR; it is the most common because of its widespread adoption in Europe. EDRs will rank pari passu with the existing shares, i.e., they are qualified to the same dividends as well as capital gains as the investors who hold common shares in the company. The shares of many non-European companies trade on European stock exchanges like the London Stock Exchange through the use of EDRs. EDRs enable local European investors to buy shares in overseas companies without the risks or inconveniences of cross-border or cross-currency transactions. American Depository Receipts (ADRs) are a similar instrument which is issued in the USA. With the use of EDRs, it is easier for individuals to invest in foreign companies, due to the large availability of price information, lower transaction costs, and timely dividend distributions.
AMERICAN DEPOSITORY RECEIPT
An American Depository Receipt is a negotiable certificate which is issued by a bank of the United States, which represents a stock of shares of a non-US company and is traded on the stock exchange of the United States. ADRs usually have their denomination in US dollars and has underlying security held overseas by a financial institution of the US. The advantage of an ADR is that it reduces the administration as well as the duty costs that would have otherwise been levied on all the transactions. The ADRs are traded on the New York Stock Exchange (NYSE), NASDAQ and AMEX.
There are different types of ADRs available in the market. They are:
- Level 1- This is the most basic type of ADR which is traded on the OTC (Over The Counter) market and not on the US stock exchanges. This type of ADR is used as an indicator to verify the interest of people of North America in its stock.
- Level 2- Level 2 represents the ADRs which are listed and are traded on the US stock exchange. These ADRs have to follow a compliance level, which is stricter than the ones imposed on Level-1. They also need to follow the regulations imposed by the SEC (Securities Exchange Commission).
- Level 3 – Level 3 represents the most important and esteemed out of all the three types of ADRs. An ADR is considered of this level only when an issuer brings up a public offer for the ADR in the US Stock Exchange. These ADRs are capable of raising capital and enjoy substantial visibility in the financial markets.