Last week, I met an old friend of mine who often trades in Indian equity market. He told me that while he was going through the U.S. market, he came across some Indian companies like Tata Motors, Dr Reddy’s, etc listed on New York Stock Exchange (NYSE). He was very puzzled to see that how a company of Indian origin can be listed on an international exchange.
I told him that Indian companies can raise foreign currency funds through the issue of American Depository Receipts(ADRs) and Global Depository Receipts(GDRs).
These ADRs and GDRs help companies to tap foreign funds and increase their shareholding base which leads to better valuations and also creates value for shareholders.
However, most companies go for the GDR route since the accounting norms and other disclosures in case of GDR are less stringent than the requirements in the U.S.
Let’s understand, what is ADR all about?
What is American Depository Receipts (ADRs)?
American Depository Receipts (ADRs) is a way of trading non-U.S. stocks on the U.S. exchange. Say Indian companies who are willing to raise funds from the U.S. can do so by issuing shares on American Stock exchange.
However, the issuance of ADR is governed by the rules and regulations as laid down by the regulator SEC (Securities and Exchange Commission). The Indian Companies will have to maintain accounts as per the American Standards.The Indian companies cannot directly list their equity shares on the international stock exchange. So in order to overcome this problem; the companies give shares to an American bank. These American banks in return for those shares provide receipts to the Indian companies. The companies raise funds by providing those ADR receipts in American share market.
One ADR comprises of a certain number of shares in an Indian company and these ADRs are quoted in US dollars. The investors of a foreign country can buy and sell shares directly and the investor is free to convert the ADR to receive the equivalent number of shares.
Let’s take an example to understand this. The U.S. based broker/dealer purchases shares of the issuer and deposits them with the bank in that market. In return, the bank issues ADRs in respect of those shares which can be then transferred to the client’s account.
An American citizen willing to invest in Infosys limited in U.S. can do so by purchasing ADR from the listed entity.
What is Global Depository Receipts (GDRs)?
GDRs are similar to ADRs except the fact that it is listed on an exchange outside the U.S. and helps the issuer to raise funds simultaneously in different markets i.e. it allows the foreign firms to trade on the exchange outside its home country.
These shares are held by a foreign bank who provides depository receipts to these companies in return for the shares. Generally, GDR stands for 10 equity shares of the underlying firm.
They are usually listed on London or Luxembourg stock exchange and even on the newer exchanges including Singapore Stock exchange.
Difference between ADR and GDR
- American Depository Receipt (ADR) is a depository receipt which is issued by a US depository bank against a certain number of shares of non-US company stock. Whereas Global Depository Receipt (GDR) is a depository receipt which is issued by the international depository bank, representing foreign company’s stock.
- Foreign companies can trade in US stock market, through various bank branches with the help of ADR. Whereas GDR helps foreign companies to trade in any country’s stock market other than the US stock market.
- ADR is issued in America while GDR is issued in Europe.
- ADR is listed in American Stock Exchange i.e. New York Stock Exchange (NYSE) whereas GDR is listed in non-US stock exchanges like London Stock Exchange or Luxembourg Stock Exchange.
- ADR can be traded in America only while GDR can be traded in all around the world.
- ADR Market is more liquid as compared to GDR market
- Investor’s participation is more in ADR as compared to GDR
- ADR market is a retail investor market whereas GDR’s market is institutional one.
- ADR’s disclosure agreements are more onerous as compared to GDR.
So if you are planning to invest in a foreign company, you can do so through this depository receipts.
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