What are depository receipts?

Depository Receipts (DRs) stand as financial instruments representing shares of a domestic company, yet they find their home on foreign stock exchanges. These DRs, denominated in foreign currency, simplify the process of international investing.

To create DRs, a specific number of underlying equity shares of the company are entrusted to a custodian bank. This pivotal step grants authorization for the issuance of depository receipts, with each DR symbolizing a precise quantity of the issuer company's underlying shares. In essence, DRs act as a bridge, connecting local investors with global investment opportunities and transcending the confines of national borders.

The Different Kinds Of Depository Receipts

There are two types of depository receipts:

1. American Depository Receipts (ADRs)

ADRs, or American Depositary Receipts, serve as a sophisticated tool for investors to access foreign markets. Issued by U.S. banks, ADRs facilitate the purchase of shares in foreign companies without the complexities of dealing directly with foreign stock exchanges or currencies.

In essence, ADRs act as a bridge, enabling investors to diversify their portfolios globally while transacting in familiar territory—U.S. dollars. These receipts offer a seamless and professional means to invest in international companies, ensuring a straightforward approach to navigate the complexities of international investments.

2. Global Depository Receipts (GDRs)

Global Depositary Receipts (GDRs) are an investor-friendly tool that simplifies international investments. Similar to ADRs, GDRs are traded on European stock exchanges like the London Stock Exchange, making them accessible to investors outside the U.S.

Here's how it works: Imagine a U.S.-based company wanting to be listed on the London Stock Exchange. By partnering with a London-based depository bank, the company issues GDRs. These GDRs represent shares in the U.S. company, but they are traded in euros or U.S. dollars, providing flexibility for global investors.

In essence, GDRs open doors to global markets, allowing investors to diversify their portfolios professionally and seamlessly.

ADR VS GDR

Indian Depository Receipts (IDRs)

Indian Depository Receipts (IDRs) are a financial bridge connecting domestic investors with international markets. They are born when Depository Receipts (DRs) find issuance within India and secure a listing on an Indian Stock Exchange, all backed by foreign stocks, offering a gateway to diverse investment possibilities.

Basis for IDRs:

The foundation of IDRs lies in two distinct structures. They can either stem from existing shares already issued by the company, where shareholders offer their shares at a grant price for conversion into DRs, a scenario referred to as a sponsored issue. Alternatively, new shares can be specifically issued for the DR offering, broadening the investment horizon.

Benefits for Companies:

Companies opting for IDRs gain invaluable access to an extensive international investor base. Allowing their shares to trade as DRs expands their global reach, attracting investments from markets that might have been out of reach due to various constraints.

• Global Investment Accessibility:

For international investors, IDRs open doors to investing in companies that were previously inaccessible. These investors can now navigate international stocks seamlessly through domestic exchanges, utilizing their existing brokers and local currency for hassle-free transactions.

• Investor Advantages:

Investors holding IDRs are entitled to dividends and capital appreciation from the underlying shares. It is pertinent to note, however, that they do not possess voting rights, setting this investment avenue apart in its unique offering.

• Consideration of Voting Rights:

The matter of voting rights for IDR holders is a subject currently under contemplation by SEBI. This reflects a balanced approach, ensuring investor interests are protected while maintaining the integrity of market dynamics. This careful evaluation demonstrates regulatory adaptability to the evolving needs of the investment landscape.

In essence, IDRs epitomize the fusion of global investment opportunities and domestic market accessibility, creating a mutually beneficial scenario for both companies and investors. With SEBI's vigilant oversight, the IDR landscape promises continued evolution, ensuring a resilient and inclusive investment environment.

Steps in Issuing Depository Receipts (DRs):

Issuing Depository Receipts (DRs) involves a meticulous process adhering to regulatory guidelines and market protocols. Here are the essential steps a company must follow:

• Compliance with Stock Exchange Requirements:

The company must comply with the listing requirements of the respective stock exchange where they intend to list the DRs. This step ensures alignment with market standards and regulations.

• Appointment of Depository Bank:

The company appoints a depository bank responsible for safeguarding the company's stocks and issuing DRs against them. This institution acts as a custodian, ensuring the secure issuance and management of DRs.

• Acquisition of Underlying Shares:

In the case of a sponsored issue, existing shareholders' stocks are acquired and delivered to the local custodian of the depository bank. Simultaneously, the company can issue fresh shares against which DRs are issued. Each DR represents a specific number of underlying company shares.

• Two-Way Tradable DRs:

DRs can be traded two-ways, subject to the regulatory provisions of the concerned countries. This flexibility enables shares to be bought in the local market and converted into DRs for trading in foreign markets. Conversely, DRs can be purchased and converted back into the underlying shares for trading on the domestic stock exchange.

• Foreign Currency Resource Mobilization:

Indian companies are permitted to raise foreign currency resources by issuing ordinary equity shares through depository receipts. Additionally, foreign companies can raise equity capital from India through Indian Depository Receipts (IDRs). This mechanism facilitates cross-border capital mobilization.

• SEBI Guidelines Adherence:

The Securities and Exchange Board of India (SEBI) has established guiding principles that companies must adhere to for issuing IDRs. These principles include limitations on the funds raised in India, implementing a one-year lock-in period for converting IDRs into shares, and making IDRs available exclusively to resident Indian investors, among other regulations.

By meticulously following these steps and abiding by regulatory frameworks, companies can seamlessly issue DRs, facilitating international investment and capital mobilization while ensuring compliance with market standards.

Frequently Asked Questions 

1. What are Depository Receipts (DRs)?

Depository Receipts (DRs) are financial instruments representing shares of domestic companies traded on foreign stock exchanges. They allow investors to invest in international companies without dealing directly with foreign markets or currencies.

2. What are the different types of depository receipts?

There are several types of Depository Receipts, including American Depository Receipts (ADRs) traded on U.S. exchanges, Global Depository Receipts (GDRs) traded on European exchanges, and Indian Depository Receipts (IDRs) traded in India. Each type offers unique opportunities for international investments.

3. How do ADRs, GDRs, and IDRs differ from each other?

ADRs are issued by U.S. banks for trading foreign company shares on U.S. exchanges, GDRs are traded on European exchanges, and IDRs are issued and traded in India, enabling investments in international companies. They differ based on the location of trading and the currencies involved.

4. What are the benefits of investing in depository receipts?

Investing in depository receipts allows diversification of investment portfolios across global markets, potentially earning capital gains and dividends. It also provides investors with the convenience of trading in their local currencies, enhancing accessibility to international investments.

5. How can investors buy and trade depository receipts?

Investors can buy and trade depository receipts through their brokerage accounts, just like regular stocks. ADRs are traded on U.S. exchanges, GDRs on European exchanges, and IDRs on Indian stock exchanges. Transactions are conducted in the respective local currencies, simplifying the investment process for individuals.