RvB

What are Depository Receipt (DR)?

Depository Receipt (DR) is a negotiable instrument supporting a fixed number of equity shares of the issuing company (Indian company), and it will be denominated in foreign currency and further will be traded on foreign exchange

Key Terminologies

Custodian bank-

• A custodian bank is a type of bank
• It is responsible for safekeeping of securities and investments that are provided by a brokerage house or investment company
• When an investors buys shares from an investment company, the investment company will pass the securities bought by the investors to the custodian bank to retain them
• The custodian bank will only hold the securities but the title of securities is with the shareholder

Depository Bank

• Depositories act as a custodian and legal owners of the securities

Two Depositories in India

1. National Securities Depository limited (NSDL)

2. The Central Depository Services (India) Limited (CDS)

• Depository receipts are issued by Depository banks
• They purchase the equivalent amount of shares from the market to back the issue of depository receipts

Process of Issue of ADR's/ GDR's

American Depository Receipt (“ADR”)

ADR

• Dollar denominated form of equity ownership
• They are issued only in American Stock Exchanges- NYSE,AMEX etc
• ADR represent a non-US company's equity share listing its stock on the US exchange

Features

• A non United States Company- deposit shares - Custodian Bank

• The custodian bank is situated in the country of incorporation of the issuing company

• ADR’s are denominated in dollars

• Process of tarding same as securities of any other US company

• The ADR holder will have the same rights as the shareholder in the home country

Advantages

• Wider shareholding for investors who want wider exposure to returns and markets
• Inexpensive source of investors to obatin stocks from other countries
• Denominated in Foreign currency i.e Dollars which has universal accepatnce
• Onlu companies with good reputaion and goodwill get an opportunity to issue ADR's
• Liquidity is greater

Disadvantages

Due to Foreign exchange fluctuations the risk borne by the investor is high

• ADR options of companies available to investors are limited

• Need to hold ADR for long period of time to seek better returns and appreciation

• The cost involved in issuing ADR’s are passed on to the holder of the ADR

GDRs or Global Depository Receipts

GDRs or Global Depository Receipts

• A Global Depositary Receipt (GDR) is a negotiable instrument issued by a depositary bank
• The depository bank is located generally in Europe
• Investors can buy GDR irrespective of whether they are in the US or not
• GDRs are commonly accessed or bought by investors in Euro market and US market.
• The first step is to convert shares into depository receipts by an International Bank then they the role of custodian banks and foreign exchanges come into play.
• The holder of a GDR will get dividends
• They do not carry any voting right
• Listing of GDR may take place in international stock exchanges such as London Stock Exchange, Luxemburg Stock Exchange etc.

GDR Primary Benefits to

Issuers

•A comapny can access capital in international markets, giving flexibility in the capital structure

• It expands market for shares,potentially enhancing overall liquidity and global visibilty of a company

• It broaden and diversifys the shareholder base

Investors

•It diversifys the investors investment portfolio- greater exposure to markets across the globe

• Trading, clearing and settlement procedures are done according to home market principals

• It eliminates cross-border custody/safekeeping charges

•

Advantages

• Wider shareholder base
• Higher goodwill
• Foreign Capital
• Low Cost
• Liquidity

Disadvantages

• Pricing of GDR's are

Difference between ADR and GDR

Features

• The size of an IDR issue shall not be less than Rs. 50 crores
• The IDRs are required to be listed in atleast one stock exchange in India having nationwide terminals
• IDRs can be converted/ redeemed into the underlying equity shares only after the expiry of one year from the date of the listing of the IDRs
• The Investor may trade the IDRs in India or can request for redemption of the IDRs to the issuer company.
• On the receipt of dividend or other corporate action on the IDRs, the Domestic Depository shall distribute the corporate benefits to the IDR holders in proportion to their holdings of IDRs
• an IDR holder can at any time nominate a person to whom his IDRs shall vest in the event of his death

Advantages of the IDR

• It provides portfolio diversification to the investor.
• It gives the facility of ease of investment.
• There is no need to know your customer norms.
• No resident Indian individual can hold more than $200,000 worth of foreign securities purchased per year as per Indian foreign exchange regulations.