A Term Paper onADR & GDRCHAITRAMURTHY(USN No: 1PI11MBA40)Section : A
AMERICAN DEPOSITORY RECEIPTSAmerican Depositary Receipts is a negotiable security that represents securitiesof a non-US company that trades in the US financial markets. Securities of aforeign company that are represented by an ADR are called Americandepositary shares (ADSs).ADRs are one type of depositary receipt (DR), which is any negotiablesecurities that represents securities of companies that is foreign to the marketon which the DR trades. DRs enable domestic investors to buy securities offoreign companies without the accompanying risks or inconveniences of cross-border and cross-currency transactions.Each ADR is issued by a domestic custodian bank when the underlying sharesare deposited in a foreign depositary bank, usually by a broker who haspurchased the shares in the open market local to the foreign company. An ADRcan represent a fraction of a share, a single share, or multiple shares of aforeign security. The holder of a DR has the right to obtain the underlyingforeign security that the DR represents, but investors usually find it moreconvenient to own the DR. The price of a DR generally tracks the price of theforeign security in its home market, adjusted for the ratio of DRs to foreigncompany shares.Therefore in simple words ADRs are: Is a negotiable certificate issued by a U.S. bank Represents a specified number of shares of a foreign company ADRs are denominated in U.S. dollars.
HOW DOES IT WORK?Let us take Infosys example – trades on the Indian stock at around Rs.2000/- This is equivalent to US$ 40 – assume for simplicity Now a US bank purchases 10000 shares of Infosys and issues them inUS in the ratio of 10:1 This means each ADR purchased is worth 10 Infosys shares. Quick calculation means 1 ADR = US $400 Once ADR are priced and sold, its subsequent price is determined bysupply and demand factors, like any ordinary shares.ADR RATIOS Single1 ADR = 1 SHAREADR Ratio = 1:1 Multiple1 ADR = 5 SHAREADR Ratio = 1:5 Fraction
1 ADR = ½ SHAREADR Ratio = 2:1SPECIMEN COPY OF ADRTYPES OF ADR: Unsponsored ADR Sponsored ADR
Level 1 Level 2 Level 3ADR LISTING: NASDAQ AMEX NYSEADVANTAGES: It is an easy and cost effective way to buy shares of a foreign company Reduces administrative costs and avoids foreign taxes on everytransaction Helps companies which are listed to tap the American equity markets Any foreigner can purchase these securities The purchaser has a theoretical right to exchange shares (non- votingright shares for voting rights)DISADVANTAGES: Limited selection: Not all foreign companies are available as ADRs. Forexample, Japans Toyota Motor has an ADR, but Germanys BMW doesnot
.Liquidity: Plenty of companies have ADR programs available, but somemay be very thinly traded. Exchange rate risk: While ADRs are priced in dollars, for sake ofconvenience, your investment is still exposed to fluctuations in the valueof foreign currencies. Because ADRs are like stocks, you need to buy enough of them to ensureadequate diversification. So if you dont have enough investment capitalto spread around, say 25 to 30 ADRs (or more), you wont be able tocreate a truly diversified portfolio on your own.GLOBAL DEPOSITORY RECEIPTSA global depository receipt or global depositary receipt (GDR) is a certificateissued by a depository bank, which purchases shares of foreign companies anddeposits it on the account. GDRs represent ownership of an underlying numberof shares.Global depository receipts facilitate trade of shares, and are commonly used toinvest in companies from developing or emerging markets.Prices of global depositary receipt are often close to values of related shares,but they are traded and settled independently of the underlying share.Several international banks issue GDRs, such as JPMorganChase, Citigroup, Deutsche Bank, The Bank of New York Mellon. GDRs are
often listed in the Frankfurt Stock Exchange, Luxembourg Stock Exchange andin the London Stock Exchange, where they are traded on the InternationalOrder Book (IOB).Normally 1 GDR = 10 Shares,but not always. It is a negotiable instrumentwhich is denominated in some freely convertible currency. It is a negotiablecertificate denominated in US dollars which represents a non-US Companyspublicly traded local equity.Global Depository Receipt is not a very different financial instrument, fromthat of ADR. In fact if the Indian Company which has issued GDRs in theAmerican market wishes to further extend it to other developed and advancedcountries such as Europe, then they can sell these ADRs to the public of Europeand the same would be named as GDR.In short GDRs are:• A bank certificate issued in more than one country for shares in a foreigncompany• Offered for sale globally through the various bank branches• Shares trade as domestic shares• Custodian Bank located in same country• Works with the Depository Bank and follows instructions from thedepository bank.
• Collects, remits dividends and forwards notices received from thedepository bank.GDR MARKET• GDRs can be created or cancelled depending on demand and supply.• When shares are created, more corporate stock is placed in the custodianbank in the depositary bank account. The depositary bank then issues thenew GDRs.• Factors governing GDR prices are company track record, analystsrecommendations, relative valuations, market conditions and alsointernational status of the company.GDR LISTING:• London Stock Exchange• Luxembourg Stock Exchange• Singapore Exchange• Hong Kong ExchangeADVANTAGES AND DISADVANTAGES:• GDRs allow investors to invest in foreign companies without worryingabout foreign trading practices, laws• Easier trading, payments of dividends are in the GDR currency
• GDRs are liquid because they are based on demand and supply which isregulated by creating or cancelling shares• GDR issuance provides the company with visibility, more larger anddiverse shareholder base and the ability to raise more capital ininternational markets• However, they have foreign exchange risk i.e. currency of issuer isdifferent from currency of GDRIN SIMPLE TERMS ADR & GDRCOMAPNY SHAREDEPOSITARY BANKINVESTORINDIA- ADR & GDR ADRs and GDRs are an excellent means of investment for NRIs andforeign nationals wanting to invest in India
By buying these, they can invest directly in Indian companies withoutgoing through the hassle of understanding the rules and working of theIndian financial market – since ADRs and GDRs are traded like anyother stock NRIs and foreigners can buy these using their regular equity tradingaccountsINDIAN COMPANIES USING ADR & GDRCOMPANY ADR GDRBAJAJ AUTO No YesDr. Reddys Yes YesHDFC Yes YesHindalco No YesICICI Yes YesInfosys Yes YesL&T No YesMTNL Yes YesRanbaxy No YesITC No YesTATA Motors Yes NoWIPRO Yes YesSBI No Yes