How ADRs work

For a real 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,
which almost anyone can buy.
The depositary receipt for ICICI is issued by
Deutsche Bank. For each depositary receipt in
circulation, Deutsche Bank holds the equivalent
number of India-listed shares on behalf of the
owners of the ADR.
One ADR or GDR does not always equal one share
of underlying stock. And with ICICI, the ADR
actually represents two India-listed shares of ICICI
and is priced accordingly.
This is quite common and is done so that the price
of the ADR is typical for the market where it trades.
Very low-priced shares may have each depositary
receipt backed by several shares
For very high-priced ones, each depositary receipt
represents a fractional claim on the underlying

shares. For example, each Nintendo ADR in the

US is worth one-eighth of a Nintendo share in
Tokyo.
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 and the price of the ADR/GDR if
the relationship moves too far out of line.
However, 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. One
persistent example of this is HDFC Bank, another
Indian bank with an ADR in New York.
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. This is typically around US$0.01-0.03
per share per year.

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 charge your broker who holds the ADRs on
your behalf. The broker will then usually pass those
fees onto you.

Sponsored versus
unsponsored ADRs
The US allows several different types of ADR. Its
important to know the difference, since they have
different degrees of backing and support from the
company you are investing in.
Unsponsored ADRs are issued without a formal
agreement between the issuing bank and the
foreign company indeed, the company may have
no desire to see its shares listed abroad at all. They
trade on the over-the-counter market.
Sponsored ADRs fall into three categories. All are
supported by the company, but with different levels
of regulation.
Level I ADRs trade in the over the counter market.
Reporting requirements are very low the
company does not need to issue any reports in the

US or under US accounting standards. It must be

listed on a foreign stock exchange and issue a
report in English in that country under local
accounting rules.
Level II ADRs can trade on a stockmarket such as
NYSE or Nasdaq. The company must register with
the Securities and Exchange Commission and
issue annual reports in the US to US accounting
standards.
Level III ADRs are used by companies that dont
simply want to float their shares abroad, but also to
raise capital in the US market. Consequently, they
are regulated to a similar standard to US
companies. They must issue a offering prospectus,
while all subsequent new releases made in their
home market must also be issued in the US to US
standards.
However, bear in mind that just because a
company officially complies with US regulations, it
does not mean that it as strongly regulated or as
transparent as you might expect from a developedmarket company. And the fact that a well-known
accounting firm has signed off on the accounts is
no guarantee that they are accurate, as many
scandals have demonstrated.

The distinction between unsponsored and

sponsored depositary receipts exists for markets
outside the US. For example, in Germany a foreign
companys shares may be listed on the BerlinBremen exchange without its consent. The
classification of sponsored ADRs into three levels
is specific to US regulatory system.

How to buy ADRs and

GDRs
You should be able to buy major ADRs and GDRs
listed in your local market through your usual stock
broker. There are stock brokers that wont deal in
any, but thats unusual these days. However,
especially with GDRs, not all discount brokers will
offer less popular stocks, so in some cases you
may need to call around to find a broker that will
carry out the trade.
If youre looking to see what ADRs and GDRs are
available worldwide, you could search the listings
in your local exchange or check the websites of
any foreign companies that interest you.
But a more convenient resource is the depositary
receipt directory maintained by BNY Mellon, one of

the big global depositary banks. This allows you to

search for depositary receipts by country, company
and place of listing.
However, not all ADRs and GDRs listed here are
tradable by retail investors. In particular, there is an
option in US securities law to issue shares that are
intended only for certain investors and these are
sometimes used for ADRs.
Rule 144-A shares are specifically only to be traded
by institutions. Regulation S shares cannot be
traded by any US person and are intended for nonUS residents in practice many are tradable by
institutions only as well. (One popular trick among
stock scammers and boiler rooms is to sell unwary
investors Regulation S shares that have no active
retail market and will be impossible to sell at
anything except a knockdown price.)
The result is that many ADRs and GDRs are not
listed on any stock exchange, are highly illiquid or
are only traded in large blocks by institutions. So
the amount of depositary receipts that are listed,
liquid and tradable by retail investors is
considerably less than the total outstanding stock
of ADRs and GDRs.

In addition, investors should take great care when

investing in unsponsored depositary receipts or any
kind of unauthorised secondary listing of a foreign
company. The liquidity of these instruments is often
very poor and it has no official backing from the
company.
Whats more, the ADR could be withdrawn at any
time and you could be waiting for some
considerable time before the depositary sells the
shares and sends you the proceeds. And you may
be hit with an unreasonably large administration
fee in the process. While a sponsored ADR can
also be withdrawn, it will typically be done in a
more shareholder-friendly way than with an
unsponsored ADR.
Hence, even though a stock may have an ADR or
GDR it may not be possible or sensible to buy this.
In general, only sponsored depositary receipts
listed on a recognised stock exchange with
reasonably liquidity are a sensible investment. In
other cases, it may be best to investigate whether
its possible tobuy the shares directly on its
domestic exchange.
However, there are a significant number of good
quality companies available as ADRs and GDRs.

They are an opportunity often overlooked by

investors, so its always worth checking whether
this may be the simplest way to invest in a
company or country, especially if you have no
desire to open brokerage accounts around the
world.

1. What are the regulations pertaining to issue of ADRs/GDRs by Indian

companies?
Indian companies are allowed to raise capital in the international market through the
issue of ADRs/GDRs. They can issue ADRs/GDRs without obtaining prior approval
from RBI if it is eligible to issue ADRs/GDRs in terms of the Scheme for Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1993 and subsequent guidelines issued by Ministry of
Finance, Government of India.
After the issue of ADRs/GDRs, the company has to file a return in the proforma given
in Annexure `C to the RBI Notification No.FEMA.20/ 2000-RB dated May 3, 2000.
The company is also required to file a quarterly return in a form specified in Annexure
`D of the same regulations.
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express
ban on investment in real estate and stock markets.