Home General Knowledge GK SPECIAL TOPIC : WHAT ARE ADR, GDR AND IDR?
GK SPECIAL TOPIC : WHAT ARE ADR, GDR AND IDR?
Written by Administrator   
Wednesday, 30 April 2014 10:11



 

WHAT ARE ADR, GDR AND IDR?

A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity that is issued by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries.

The increasing demand for Depositary Receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally in the most efficient manner possible. While most investors recognize the benefits of global diversification, they also understand the challenges presented when investing directly in local trading markets. These obstacles can include inefficient trade settlements, uncertain custody services and costly currency conversions. But Depositary Receipts offer cost benefits and conveniences.

How Does the DR Work?

The DR is created when a foreign company wishes to list its already publicly traded shares or debt securities on a foreign stock exchange. Initial public offerings, however, can also issue a Depository Receipt.

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.

American Depository Receipt

ADRs allow U.S. investors to invest in non-U.S. companies and give non-U.S. companies easier access to the U.S. capital markets.

The first ADR was created in 1927 by a U.S. bank to allow U.S. investors to invest in shares of a British department store. Today, there are more than 2,000 ADRs available representing shares of companies located in more than 70 countries.

ADRs may be “sponsored” or “unsponsored.” Sponsored ADRs are those in which the non-U.S. company enters into an agreement directly with the U.S. depositary bank to arrange for recordkeeping, forwarding of shareholder communications, payment of dividends, and other services. An unsponsored ADR is set up without the cooperation of the non U.S. Company and may be initiated by a broker dealer wishing to establish a U.S. trading market.

Global Depository Receipt

A global depository receipt is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. Global depository receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets.

The typical GDR structure offers DRs in Europe or other non-US markets pursuant to Regulation S (Reg S) promulgated under the US Securities Act of 1933. GDRs are listed on a European stock exchange such as London or Luxembourg and clear through the Euromarkets clearing systems, Euroclear and Clearstream. GDRs may also be listed on other exchanges, such as Dubai and Singapore. The ability of retail investors to purchase GDRs will depend on the type and location of the listing. In general, however, GDR offerings are aimed at institutional investors and depending on the exchange, they can then be purchased by retail investors in the secondary market.

Indian Depository Receipt

An Indian Depository Receipt (IDR) is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the SEBI) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian Securities Markets.

The foreign company IDRs will deposit shares to an Indian Depository. The depository would issue receipys to investors in India against these shares. The benefit of underlying shares (like bonus, dividends etc.) would accrue to the depository receipt holders in India

Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India.

Benefits of Depository Receipts

To the Issuers

a) Broaden and diversify a company’s investor base.

b) Enhance a company’s visibility, status and profile internationally among institutional investors.

c) Establish/increase total global issuer liquidity by attracting new investors.

d) Develop and/or increase research coverage outside the home market.

e) Get an international valuation as the Company is valued alongside its peer group.

f) Offer a new avenue for raising equity capital.

g) Meet internationally accepted corporate governance standards.

h) Trading of GDRs alongside their peer group in the international markets.

To the Investors

a) Easier to purchase and to hold than the issuer’s underlying ordinary shares.

b) Trade easily and conveniently in US dollars and settle through established clearinghouses.

c) Facilitate diversification into securities of foreign issuers.

d) Create accessibility of price, trading information and research.

e) Represent a way to provide international exposure for institutional investors (mutual funds, pension funds) despite restrictions against investing in certain countries or in foreign investment instruments.

f) Eliminate unfamiliar custody safekeeping arrangements.



 


 

Add comment


Security code
Refresh

Articles
Newsletter Subscription
Fill the form below to subscribe for recieving email alerts from rosemaryinstitute.com