GLOBAL DEPOSITORY RECEIPTS
What are depositary receipts?
American Depository Receipt Let us begin with explaining u what a depository receipt is. A depository receipt or a DR is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. The issue of such instruments involves the delivery of ordinary shares of an Indian company to a domestic custodian bank in India, which in turn instructs an overseas depository bank to issue GDR(global depository receipt) on a predetermined ratio. The GDR can be sold outside India in their existing form. The underlying shares (arising after redemption of GDR) can also be sold in India While ADRs are listed on the US stock exchanges, the GDRs are usually listed on a European stock exchange. A GDR may evidence one or more GDS(global depository share). Each GDS represent underlying share of Issuing company. A GDR or ADR means any instrument in the form of a Depository receipt or certificate by whatever name it is called, created by the Overseas Depository Bank (ODB) outside India and issued to non-resident investors against the issue of ordinary shares or foreign currency convertible bonds of issuing company. These are negotiable instruments denominated in US $ representing a non-US company's publicly traded, local currency equity shares. One of the most common types of GDRs is the American depositary receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s.While ADRs are listed on the US stock exchanges, the GDRs are usually listed on a European stock exchange. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage. ADRs were introduced as a result of the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values. For this reason, U.S. banks simply purchase a bulk lot of shares from the company, bundle the shares into groups, and reissues them on either the New York Stock Exchange(NYSE), American Stock Exchange(AMEX) or the Nasdaq. In return, the foreign company must provide detailed financial information to the sponsor bank. In brief, an ADS is a Common stock (ordinary shares )of a foreign corporation , held by a US bank in a custodial account on behalf of a stockholder and American Depository Receipts (ADRs ) are issued against ADS. There are three different types of ADR issue:- level 1, level 2 and level 3. Level 1 - This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-the-counter market and are an easy and inexpensive way to gauge interest for its securities in North America. Level 1 ADRs also have the loosest requirements from the Securities and Exchange Commission (SEC). Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs have slightly more requirements from the SEC, but they also get higher visibility trading volume. Level 3 - The most prestigious of the three, this is when an issuer floats a public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.S. financial markets.
There are four main parties that come to play with ADRs:
(1) The issuing corporation is the first party. This is typically a large foreign-based corporation that is already listed on a major foreign exchange. Rather than dual list its shares on its home exchange and on a U.S. exchange, the issuer sells a bulk amount of its shares to a trusted...