Depository Receipts

 A depositary receipt (DR) is a negotiable certificate representing shares

in a foreign company traded on a local stock exchange.
 Depositary receipts allow investors to hold equity shares of foreign
companies without the need to trade directly on a foreign market.
 Depositary receipts allow investors to diversify their portfolios by
purchasing shares of companies in different markets and economies.
 Depositary receipts are more convenient and less expensive than
purchasing stocks directly in foreign markets.

Instead of individual investor approaching the foreign equity market, the

investor’s money is collected by an institution or bank called as Depository.
The Depository Bank would evaluate & complete the legal requirement and
would buy equity shares of the foreign firms. Equity shares would be held by
the depository and receipts will be given to the investors. This Depository
receipt spelt out the claim on the benefits of equity shares held by the
depository. Hence, all the benefits of dividend, bonus shares etc. are passed on
the investors by depository in proportion to their investment.
GDR (Global Depository Receipts)
A GDR is a negotiable instrument issued by a depository bank in international
markets. This receipt represents ownership of shares in a non-US company,
enabling the company (i.e.) to access investors in capital markets outside its
home country.
Each GDR represents a specific number of underlying ordinary shares in the
international company. A GDR can be denominated in any freely convertible
currency.
Features
1) GDR’s are issued to investors in more than one country.
2) GDR’s are issued to investors by the depository bank and not the issuing
company. This means that in the books of issuing company, the
depository bank appears as the shareholder. GDR holders, therefore,
does not have voting rights. The voting rights accrue only to the
depository bank.
 3) The proceeds are collected in foreign currency thus, enabling the issues
to utilise the same for meeting the forex component project cost,
repayment of foreign currency loans, meeting overseas commitments
and for similar other purposes.
4) An investor who wants to cancel his GDR may do so by advising the
depository to request the Custodian. The GDR can be cancelled only
after a cooling period of 45 days. The Depository will instruct custodian
about cancellation of the GDR and to release the corresponding shares,
collect the sales proceeds and remit the same abroad.
5) An investor can sell GDR’s as is on the proper exchanges, or the investor
can convert them into regular stock for the company.
6) GDR holders are entitled to all corporate benefits available to equity
holders such as dividend, bonus and rights in the same proportions as
their entitlement. GRS’s and their dividends are priced in the local
currency of the exchanges where the shares are traded.
7) Indian companies that have a solid financial record of about three years
are readily allowed access to global financial markets through the use of
a GDR. However, clearances are required from the Foreign Investment
Promotion Board (FIPB) and the Ministry of Finance.
Mechanism of GDR
1) The domestic company wishing to issue equity shares favouring
international investors is called “The Issuing Company”. It enters into an
agreement with an international investment bank to act as the
depository bank. The agreement generally called the depository
agreement specifies the right and obligations of the parties and the
terms of the GDR issue. Normally through this agreement, the
depository bank waives its voting rights in favour of the management.
This mitigates the risk of losing management control.
2) The issuing company appoints an international merchant bank to act as
“Lead Manager”. The lead manager is required to market the issue to
international investors by conducting ‘Road Shows ”. These road shows
are seminar or work – shops held for educating investors about the
background, financial status and future prospectus of issuing company.
3) After such road shows the lead manager arranges ‘book runners’ who
are specialized agencies for establishing and analysing investor response
to the issue. The purpose of this analysis is to help the issuing company
to price the issue at an appropriate level.
4) After the issue price is decided, the lead manager collects subscription
money form potential investors and after deducting their fees transfers
the collected amount to the depository bank.
5) The proceeds of the GDR issues are held by the depository bank on
behalf of the issuing company.
6) The issuing company now issues physical shares in favour of the
depository bank and submits then to a domestic bank in the country of
the issuing company which acts as an agent of the depository bank.
7) This domestic bank keeping custody of the underlying shares pertaining
to the GDR issue is called ‘Custodian Bank’. This bank is appointed by the
depository bank which pays all the fees of the custodian bank.
8) On receiving confirmation from the custodian bank regarding receipt of
the underlying equity shares, the depository bank issues GDR’s to the
successful applicants to the issue.
9) The issuing company now helps the depository bank to arrange listing of
the GDR’s. Most of Indian companies list the GDR’s on the international
stock exchanges in London and Luxumberg. This helps investors to freely
trade in GDR’s. The depository bank now also appoints an international
clearing system which operates like a registrar and transfer agent cum
depository. The clearing system maintains up to date information data
base of GDR holders. Distribution of all corporate benefits is done by the
Custodian bank on behalf of the depository in co-ordination with the
clearing system.
 American Depository Receipt
American Depositary Receipts (ADR) are negotiable security
instruments that are issued by a US bank that represent a specific
number of shares in a foreign company that is traded in US financial
markets. ADRs pay dividends in US dollars and trade like regular
shares of stock. Companies can now purchase stocks of foreign
companies in bulk and reissue them on the US market. ADRs are
listed on the NYSE, NASDAQ, AMEX and can be sold over-the-
counter.
Types of American Depositary Receipts

The ADRs that are sold in US financial markets can be categorized

into sponsored and unsponsored.

1. Sponsored ADR

For a sponsored ADR, the foreign company issuing shares to the

public enters into an agreement with a US depositary bank to sell
its shares in US markets. The US bank is responsible for
recordkeeping, sale, and distribution of shares to the public,
distribution of dividends, etc. Sponsored ADRs can be listed on
the US stock exchanges.
2. Non-Sponsored ADR

A non-sponsored ADR is created by brokers/dealers without the

cooperation of the foreign company issuing the shares. Non-
sponsored ADRs are traded in US over-the-counter markets
without requiring registration with the Securities and Exchange
Commission (SEC).

Before 2008, any brokers and dealers trading in ADRs were

required to submit a written application before being allowed to
trade in the US. The 2008 SEC amendment provided an
exemption to foreign issuers that met certain regulatory
conditions. Non-sponsored ADRs are only traded on over-the-
counter markets.

Levels of American Depositary Receipts

ADRs are grouped into three levels depending on the extent of

the foreign company’s access to the US trading market.

1. Sponsored Level I

Level I is the lowest level at which sponsored ADRs can be issued.

It is the most common level for foreign companies that do not
qualify for other levels or that do not want their securities listed
on US exchanges. Level I ADRs are subject to the least reporting
requirements with the Securities and Exchange Commission, and
they are only traded over the counter.

The companies are not required to issue quarterly or annual

reports like other publicly traded companies. However, Level I
issuers must have their stock listed on one or more exchanges in
the country of origin. Level I can be upgraded to Level II when the
company is ready to sell through US exchanges.

2. Sponsored Level II ADRs

Level II ADRs have more requirements from the SEC than Level I,
and the company gets an opportunity to establish a higher
trading presence on the US stock markets. The company must file
a registration statement with the SEC.

Also, the company must file Form-20-F in accordance with the

GAAP or IFRS standards. Form 20-F is the equivalent of Form-10-
K, which is submitted by US publicly traded companies. If the
issuer fails to comply with these requirements, it may be delisted
or downgraded to Level I.

3. Sponsored Level III ADRs

Level III is the highest and most prestigious level that a foreign
company can sponsor. A foreign company at this level can float a
public offering of ADRs to raise capital from American investors
through US exchanges. Level III ADRs also attract stricter
regulations from the SEC.

The company must file Form F-1 (prospectus) and Form 20-F
(annual reports) in accordance with GAAP or IFRS standards. Any
materials distributed to shareholders in the issuer’s home country
must be submitted to the SEC as Form 6-K.

Examples of foreign companies that have managed to enter this

ADR level include Vodafone, Petrobras, and China Information
Technology.