What is depository receipt (DR)?
Depository receipts are securities that are traded in the foreign currency. These receipts are issued by the foreign bank or institution which acts as a depository of shares issued by a domestic company.
How does the depository work?
If an Indian company wants to raise funds from the investors in United states of America and lists itself in the USA stock exchange (NASDAQ) , the company approaches an intermediary which acts as a depository. Since the shares are in the denomination of Indian rupees, these are not directly listed on the stock exchange of USA hence the depository works as an Intermediary. Here the Indian company releases and deposits the new shares with the depository. The depository in turn issues the depository receipts to the investors in USA. A depository in USA generally will be an investment bank registered with Security exchange commission (SEC) of USA. As Securities exchange board of India (SEBI) is the capital market regulator in India SEC is in USA.
The depository will have a custodian in India where the new shares are deposited. The custodian can be the Indian arm of the depository or an independent company which provides the related services to the US based depository.
Advantages of depository receipts
The depository receipts issued give more credibility to the company and bring out new avenues for raising capital at competitive rates. A better trading in domestic shares is encouraged as well. Depository receipts provide a greater chance to the investors investing in the foreign country without going through too many hassles of transactions across the border, rules and regulations pertaining to foreign stock exchange trading, currency risk etc. Depository receipts also give flexibility to the investors in investing in their home country and beyond making investing attractive in the global markets. The depository receipt holders in USA have the same rights as those of their domestic shareholder counterparts. They are entitled to receive the same dividends, stock splits, rights issues, bonus shares, voting rights and bankruptcy dividends except for the fact that they receive the dividends in either USD or Euro. The benefits of the investors are routed through the depository.
Classification of depository receipts
Depository receipts are broadly classified as American depository receipt ( ADR) or Global depository receipt( GDR).
American depository receipt (ADR)
American depository receipts are certificates that represent the Indian shares listed and traded in the American stock exchanges (NYSE, NASDAQ, AMEX etc). American depository receipts are traded in US dollars. The investors in ADR s are generally the institutional investors such as financial institutions, mutual funds etc. Some of the examples of ADRs issued by the Indian companies in the US market are Dr. Reddy, ICICI Bank, Infosys tech, VSNL, WIPRO etc. The companies can also list ADRs without having the shares listed in the domestic market. The listing of ADRs in the US market comes under the ambit of SEC (security exchange commission of USA).
Global depository receipt (GDR)
GDRs are similar to ADRs except that the former are generally listed in the stock exchanges outside US such as London stock exchange, Luxembourg stock exchange etc. They can be traded in either in USD or Euros. When a company aims at raising capital from the investors in Europe then it follows the GDR route. Apart from this issuance of Global depository receipts is easy and little time consuming when compared to ADRs due to more stringent accounting methods followed by SEC such as generally accepted accounting principle (GAAP) compared to International accounting standards (IAS) by Europe. It is also expensive and time consuming to issue ADRs when compared to GDRs. Some of the GDRs issued by the Indian companies are Bajaj Auto, Hindalco, ITC, Ranbaxy labs, SBI etc.
Indian depository receipt (IDR)
Since 2006 the securities exchange board of India (SEBI) has given guidelines for the foreign companies who wish to raise capital from India by issuing Indian depository receipts. As per the guidelines foreign companies can list the shares in their home country and the Indian depository receipts will be raised against the shares issued by the foreign company by the domestic depositories in India. IDRs are allowed for the domestic investors in India and not for NRIs and foreign institutional investors (FIIs). In case of NRIs and FIIs to posses IDRs, they need a special approval / permission from RBI. Indian investors can benefit by investing in the foreign company stocks and also have a lesser risk by opting through IDR route rather than investing in the foreign stocks directly.