A depository receipt or depositary receipt (DR) is a negotiable financial instrument that represents a foreign company’s (issuing company which is incorporated outside India) publicly traded debt or equity in domestic exchanges. The depository receipts (DRs) which are created by a Domestic Depository bank against the underlying equity shares of the issuing company are termed as negotiable instruments. The depository receipts are listed in the local stock exchange to enable trading of foreign securities in the form of ADR/GDR etc.
A depository bank (U.S. usage) or depositary bank (predominantly EU usage) is a specialist financial entity which facilitates investment in securities markets. When a foreign company needs to list its securities on another country’s stock exchange, it has to fulfill the listing criteria for DRs in the other country. Depository certificates are created when a company’s shares or bonds are delivered to depository’s custodian bank. Once the custodian bank receives the shares of specified company, it would confirm the depository Bank receipt of the same and instructs the depository bank to issue the receipts to the investors. These DRs are then issued, listed and traded in the local stock exchanges of the other country. The Depositary receipts that are listed and traded in the United States such as Nasdaq and NYSE are known as American depositary receipts (ADRs). Similarly, depository receipts listed and traded in the European exchange such as London Stock Exchange are known as Global Depository Receipts (GDR) or European Depository Receipts /International Depository Receipts. The Price of ADR is denominated in US Dollars. The GDRs are denominated either in US Dollars or in Euros but mostly denominated in US Dollars.
The ADR investors hold privileges like those granted to shareholders of ordinary shares, such as voting rights and cash dividends. The ADR transactions of Indian Corporates (mainly software companies) will take place in US Dollars and settled like any other US transaction on the NYSE or NASDAQ. The DRs provide an opportunity to expatriates to invest in companies of their home countries.
How it works?
For example M/s. Infosys of India wants to list its publicly traded shares on NYSE in the form of ADR. The company approaches an US based bank to issue ADR. A brokerage house would purchase domestic shares of Infosys from the Indian Market and deliver it to the custodian bank of depository bank in India (say the local custodian bank of CITI Bank N.A, Newyork (Depository Bank) is Citi Bank, Mumbai branch). ADRs will be issued by CITI Bank N.A, Newyork (Depository Bank), on the predetermined ADR ratio i.e. for one ADR is equivalent to so many numbers of Indian shares of Infosys (arrived through converting Rupee price of Infosys in domestic market into Dollars).
Indian Depository Receipts:
Indian Depository Receipts (IDRs) are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India. Normally, foreign companies with significant business presence in India raise money through IDRs.