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Depository Receipts What are Depository Receipts (DRs)? A DR is a type of negotiable (transferable) financial security traded on a local stock exchange but represents a security, usually in the form of equity, issued by a foreign, publicly-listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of DRs is the American depository receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s. Since then, DRs have spread to other parts of the globe in the form of global depository receipts (GDRs). The other most common type of DRs are European DRs and International DRs. ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in US dollars, but can also be denominated in Euros. How do DRs work? 1
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Depository Receipts

What are Depository Receipts (DRs)?

A DR is a type of negotiable (transferable) financial security traded on a local stock exchange but represents a security, usually in the form of equity, issued by a foreign, publicly-listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of DRs is the American depository receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s.

Since then, DRs have spread to other parts of the globe in the form of global depository receipts (GDRs). The other most common type of DRs are European DRs and International DRs. ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in US dollars, but can also be denominated in Euros.

How do DRs work?

DRs are created when a foreign company wishes to list its securities on another country’s stock exchange. For this, the issuing company has to fulfil the listing criteria for DRs in the other country. Before creating DRs, the shares of the foreign company, which the DRs represent, are delivered and deposited with the custodian bank of the depository creating the DR. Once the custodial bank receives the delivery of shares, the depository creates and issues the DR to investors in the country where the DRs are listed. These DRs are then listed and traded in the local stock exchanges of the other country.


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American Depositary ReceiptMeaning:-

An American depositary receipt (ADR) is a negotiable security that represents securities of a non-US company that trade in the US financial markets. Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs).

Shares of many non-US companies trade on US stock exchanges through ADRs. ADRs are denominated and pay dividends in US dollars and may be traded like regular shares of stock.

This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on the NYSE, AMEX or NASDAQ as well as OTC.

Definition of 'American Depositary Receipt - ADR'

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.

ADRs are one type of depositary receipt (DR), which is any negotiable securities that represents securities of companies that is foreign to the market on which the DR trades. DRs enable domestic investors to buy securities of foreign


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companies without the accompanying risks or inconveniences of cross-border and cross-currency transactions.

Each DR is issued by a domestic depositary bank when the underlying shares are deposited in a foreign custodian bank, usually by a broker who has purchased the shares in the open market local to the foreign company. A DR can represent a fraction of a share, a single share, or multiple shares of a foreign security. The holder of a DR has the right to obtain the underlying foreign security that the DR represents, but investors usually find it more convenient to own the DR. The price of a DR generally tracks the price of the foreign security in its home market, adjusted for the ratio of DRs to foreign company shares. In the case of companies domiciled in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depositary banks have various responsibilities to DR holders and to the issuing foreign company the DR represents.

ADR programs (facilities)

When a company establishes an ADR program, it must decide what exactly it wants out of the program, and how much time, effort, and other resources they are willing to commit. For this reason, there are different types of programs, or facilities, that a company can choose.

Unsponsored ADRs

Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each depositary services only the ADRs it has issued.

Due to a recent SEC rule change making it easier to issue Level I depositary receipts, both sponsored and unsponsored, hundreds of new ADRs


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have been issued since the rule came into effect in October 2008. The majority of these were unsponsored Level I ADRs and now approximately half of all ADR programs in existence are unsponsored.

Sponsored Level I ADRs ("OTC" facility)

Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent.

A majority of American depositary receipt programs currently trading are issued through a Level 1 program. This is the most convenient way for a foreign company to have its equity traded in the United States.

Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to issue quarterly or annual reports in compliance with U.S. GAAP. However, the company must have a security listed on one or more stock exchange in a foreign jurisdiction and must publish in English on its website its annual report in the form required by the laws of the country of incorporation, organization or domicile.Companies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets.

Sponsored Level II ADRs ("Listing" facility)

Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the U.S. SEC and is under SEC regulation. In addition, the company is required to file a Form 20-F annually. Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S. company. In their filings, the


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company is required to follow U.S. GAAP standards or IFRS as published by the IASB.

The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX).

While listed on these exchanges, the company must meet the exchange’s listing requirements. If it fails to do so, it may be delisted and forced to downgrade its ADR program.

Sponsored Level III ADRs ("offering" facility)

A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies.

Setting up a Level 3 program means that the foreign company is not only taking steps to permit shares from its home market to be deposited into an ADR program and traded in the U.S.; it is actually issuing shares to raise capital. In accordance with this offering, the company is required to file a Form F-1, which is the format for an Offering Prospectus for the shares. They also must file a Form 20-F annually and must adhere to U.S. GAAP standards or IFRS as published by the IASB. In addition, any material information given to shareholders in the home market, must be filed with the SEC through Form 6K.

Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign companies with a Level 3 program set up are the easiest on which to find information. Examples include the British telecommunications company Vodafone (VOD), the Brazilian oil company Petrobras (PBR), and the Chinese technology company China Information Technology, Inc. (CNIT).


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Restricted Programs

Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. There are two SEC rules that

allow this type of issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs.

Privately placed (SEC Rule 144A) ADRs

Some foreign companies will set up an ADR program under SEC Rule 144A. This provision makes the issuance of shares a private placement. Shares of companies registered under Rule 144-A are restricted stock and may only be issued to or traded by Qualified Institutional Buyers (QIBs).

US public shareholders are generally not permitted to invest in these ADR programs, and most are held exclusively through the Depository Trust & Clearing Corporation, so there is often very little information on these companies.

Offshore (SEC Regulation S) ADRs

The other way to restrict the trading of depositary shares to US public investors is to issue them under the terms of SEC Regulation S. This regulation means that the shares are not, and will not be registered with any United States securities regulation authority.

Regulation S shares cannot be held or traded by any “U.S. person” as defined by SEC Regulation S rules. The shares are registered and issued to offshore, non-US residents. Regulation S ADRs can be merged into a Level 1 program after the restriction period has expired, and the foreign issuer elects to do this.


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Sourcing ADRs

One can either source new ADRs by depositing the corresponding domestic shares of the company with the depositary bank that administers the ADR program or, instead, one can obtain existing ADRs in the secondary market. The latter can be achieved either by purchasing the ADRs on a US stock exchange or via purchasing the underlying domestic shares of the company on their primary exchange and then swapping them for ADRs; these swaps are called cross book swaps and on many occasions account for the bulk of ADR secondary trading. This is especially true in the case of trading in ADRs of UK companies where creation of new ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government; sourcing existing ADRs in the secondary market (either via cross book swaps or on exchange) instead is not subject to SDRT.

ADR termination

Most ADR programs are subject to possible termination. Termination of the ADR agreement will result in cancellation of all the depositary receipts, and a subsequent delisting from all exchanges where they trade. The termination can be at the discretion of the foreign issuer or the depositary bank, but is typically at the request of the issuer. There may be a number of reasons why ADRs terminate, but in most cases the foreign issuer is undergoing some type of reorganization or merger.

Owners of ADRs are typically notified in writing at least thirty days prior to a termination. Once notified, an owner can surrender their ADRs and take delivery of the foreign securities represented by the Receipt, or do nothing. If an ADR holder elects to take possession of the underlying foreign shares, there is no guarantee the shares will trade on any US exchange. The holder of the foreign shares would have to find a broker who has trading authority in the foreign market where those shares trade. If the owner continues to hold the ADR past the effective date of termination, the depositary bank will continue to hold the


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foreign deposited securities and collect dividends, but will cease distributions to ADR owners.

Usually up to one year after the effective date of the termination, the depositary bank will liquidate and allocate the proceeds to those respective clients. Many US brokerages can continue to hold foreign stock, but may lack the ability to trade it overseas.

What types of companies issue ADRs?

ADRs issuers can be small, mid or large capitalization corporations. Any non-U.S company seeking to engage the US market to diversify its investor base, raise capital in the U.S or offer US-type employee plans.

What are the benefits of ADRs for U.S. investors?

U.S. investors generally prefer to purchase ADRs rather than ordinary shares in the issuer’s home market because ADRs trade, clear and settle according to U.S. market conventions. One of ADRs´ main advantages is the facilitation of diversification into foreign securities. ADRs also allow easy comparison to securities of similar companies as are quoted in U.S. dollars. ADR holders also appreciate dollar dividend payments and receiving corporate action notifications. Investors can also diversify their portfolio without having to purchase and hold securities outside of their local market.

Advantages of ADR

• It is an easy and cost effective way to buy shares of a foreign company.

• Reduces administrative costs and avoids foreign taxes on every transaction.

• Helps companies which are listed to tap the American equity markets.

• Any foreigner can purchase these securities.

• The purchaser has a theoretical right to exchange shares ( non- voting right shares for voting rights)


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Global Depository Receipt


Global Depository Receipts or simply GDRs, were developed on the basis of American depositary receipts (ADRs), to securitize the ownership in shares. GDRs are, in simple terms, securities that represent an underlying foreign share. Global Depository Receipts are traded instead of the original shares on exchanges worldwide. For all practical purposes, everything is exactly the same as a direct share listing on the Frankfurt Stock Exchange. The benefit is that, once the Global Depository Receipt is established, it can then be traded on any stock exchange in the world.

Global Depository Receipts have come into prominence recently as being one of the favored instruments to go public on the Frankfurt Stock Exchange and other exchanges. They are not complicated to understand and they trade just like a direct stock listing. Investors shall not likely even know the difference.

Global Depository Receipts have a long and respected history. The history of Global Depository Receipts began in the late 1920s when Selfridges, the London department store, decided to expand its investor population in the US. A US bank, Guaranty Trust, solved the problem by holding the Selfridges shares in London in its own name, which was recorded on the UK register, and then issuing promissory notes representing those shares in New York. Being both denominated in US dollars and issued against a US legal contract with investors, the promissory notes traded as US securities in New York and worked in exactly the same


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manner as other US securities. Ownership of the promissory notes was recorded in a US-held register.

Thus, Global Depository Receipts have worked successfully for decades to encourage investment between one country and another.

Definition of GDRs

GDRs mean global depository receipts. It is negotiable and transferable from one body to another. It is also evidence of ownership of a company's shares. When a bank purchases shares of foreign company, at that time it issues a certificate, that certificate is called global depository receipt.

Suppose A USA based company wants to buy the shares of Indian company, then it only possible by getting GDRs. USA Company can buy Indian company shares by the help of his bank. Bank takes some charges and issues GDR.

Importance of GDRs

If any company gets GDRs for his purchased shares, then these can be sold in any stock market of world through global network of banks and financial institutions.

Global Depositary Receipts (GDRs) give power to investors and companies access to two or more markets, most frequently the US market and the Euromarkets, with one security. GDRs are most commonly used when the company is raising capital in the local market as well as in the international and US markets, either through private placement or public offerings.


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Securities and Exchange Commission of USA has allowed USA companies and also foreign companies to buy and sell shares through GDRs. Among the Indian Companies, Reliance Industries Ltd. was the first company to get funds through a GDR issue, after this many other Indian Companies like Infosys, WIPRO AND ICICI have started to raise funds via GDRs. It is the good way for getting foreign investment for developing economy.

Advantages of GDR

GDR allow investors to invest in foreign companies without worrying about foreign trading practices, laws.

Easier trading, payments of dividends are in the GDR currency. GDR are liquid because they are based on demand and supply which is

regulated by creating or canceling shares.

However, they have foreign exchange risk i.e. currency of issuer is different from currency of GDR.

Objective of a Global Depository Receipts is:


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1) To enable a foreign company to seamlessly list on the Frankfurt Stock Exchange, and

2) To enable investors in the European markets, who would not necessarily feel comfortable buying securities directly in the securities’ home country, to purchase the foreign company’s stock on the Frankfurt Stock Exchange.

Indian Depository Receipt

An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets.

The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefit of the underlying shares (like bonus, dividends etc) would accrue to the depository receipt holders in India.

The Ministry of Corporate Affairs of the Government of India, in exercise of powers available with it under section 642 read with section 605A had prescribed the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number GSR 131(E) dated February 23, 2004.

Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India.


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The rules provide inter alia for

(a) Eligibility for issue of IDRs

(b) Procedure for making an issue of IDRs

(c) Other conditions for the issue of IDRs

(d) Registration of documents

(e) Conditions for the issue of prospectus and application

(f) Listing of Indian Depository Receipts

(g) Procedure for transfer and redemption

(h) Continuous Disclosure Requirements

(i) Distribution of corporate benefits.

These rules (“principal rules”) were operationalised by the Securities and Exchange Board of India (SEBI)—the


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Indian markets regulator in 2006. Operation instructions under the Foreign Exchange Management Act were issued by the Reserve Bank of India on July 22, 2009. The SEBI has been notifying amendments to these guidelines from time to time.

What are Indian Depository Receipts (IDRs)?

IDRs are like American Depository Receipts or Global Depository Receipts, except that the issuer is a foreign company raising funds from the Indian market. IDRs are rupee-denominated and created by a domestic depository against the underlying equity shares of a foreign company.

Who can issue IDRs?

Any company listed in the country of incorporation can issue IDRs. Besides, the issuer needs pre-issue capital and free reserves of at least $50 million (around Rs 225 crore) and should have a market capitalization of $100 million (Rs 450 crore) or more during the last three years. The company should have also made profits in three of the preceding five years.

How will it work?

The process is similar to an initial public offering where a draft prospectus is filed with the Securities and Exchange Board of India.

The minimum issue size is $500 million (around Rs 2,250 crore). Shares underlying IDRs will be deposited with an overseas custodian who will hold shares on behalf of a domestic depository. IDRs will be issued through a public offer in India in the demat form and will be listed on Indian exchanges. Trading and settlement will be similar to those of Indian shares.


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At least half of the investors have to be qualified institutional investors with 30 per cent of the issue size reserved for small investors. Recently, the regulators allowed a single institutional investor to acquire up to 15 per cent of the issue size. In addition, banks have also been allowed to participate.

For a retail investor, the annual $200,000 ceiling (Rs 90 lakh) on overseas remittances, which can be used to buy shares, will not apply to IDRs, as the issues are rupee-denominated.

Will Indian investors get equal rights as shareholders?

Except attending annual general meetings and voting on resolutions, other rights are available.

Are there tax issues?

IDRs are not subject to securities transaction tax. Besides, dividends received by IDR holders will not be subject to dividend distribution tax. But, at present, exemption from long-term capital gains tax and concessional short-term capital gains are not available for secondary sales on the stock exchanges. However, the issue is expected to be resolved with the implementation of the Direct Tax Code.

What are the benefits for the issuing company?

The main benefit is in terms of branding, besides allowing foreign companies to access Indian capital. It is also seen as the platform for creation of acquisition currency and a management talent pool. Issuers have the option to reserve a proportion of the issue for employees.

Why do you need an IDR?


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An IDR is meant to diversify your holdings across regions to free you from a “region bias” or the risk of a portfolio getting too concentrated in the home market. You need to study the firm’s financials before you buy its IDR. However, since these IDRs are listed, bought and sold on the Indian markets, the impact of global markets and exchange-rate risks are reduced, though not totally eliminated.

How can you apply?

You can apply for an IDR the way you apply for equity shares. The facility of Application Supported by Blocked Amount is also available for IDR holders. In other words, your application money won’t leave your bank account till you are finally allotted the shares. The money is blocked, but continues to earn interest on it. If you aren’t allotted shares or IDRs in this case, the money is released.