American Depository Receipt
Overview
Introduced to the financial markets in 1927, an American Depository Receipt (ADR) is a stock that trades in the
Primarily the difficulties associated with trading at different prices and currency values. For this reason,
The depository bank sets the ratio of U.S. ADRs per home country share. This ratio can be anything less than or greater than 1. The reason they do this is because they wish to price the ADR high enough as to show substantial value, yet low enough, so that the individual investors can purchase these shares.
Most investors try to avoid investing in penny stocks, and many would shy away from a company trading for 50 Russian Roubles per share, which equates to $1.50 US per share. As a result, the majority of ADRs range between $10 and $100 per share. If, in the home country, the shares were worth considerably less, then each ADR would represent several real shares.
What Does American Depositary Receipt - ADR Mean?
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
An American Depositary Receipt (or ADR) represents the ownership in the shares of a foreign company trading on US financial markets. The stock of many non-US companies trades on US exchanges through the use of ADRs. ADRs enable US investors to buy shares in foreign companies without undertaking cross-border transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.
Each ADR is issued by a
Depository banks have numerous responsibilities to an ADR holder and to the non-US company the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the British retailer Selfridges&Co. The largest depository bank is the Bank of New York Mellon.
ADVANTAGES OF ADRs:
There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective way to buy shares of a foreign company. The individuals are able to save considerable money and energy by trading in ADRs, as it reduces administrative costs and avoids foreign taxes on each transaction. Foreign entities prefer ADRs, because they get more
The shares represented by ADRs are without voting rights. However, any foreigner can purchase these securities whereas shares in
Types of ADR programs
When a company establishes an American Depositary Receipt program, it must decide what exactly it wants out of the program and how much they are willing to commit. For this reason, there are different types of programs that a company can choose.
Unsponsored shares
Unsponsored shares are ADRs that trade on the over-the-counter (OTC) market. These shares have no regulatory reporting requirements and are issued in accordance with market demand. The foreign company has no formal agreement with a custodian bank and shares are often issued by more than one depositary. Each depositary handles only the shares it has issued.
Due to the hassle of unsponsored shares and hidden fees, they are rarely issued today. However, there are still some companies with outstanding unsponsored programs. In addition, there are companies that set up a sponsored program and require unsponsored shareholders to turn in their shares for the new sponsored. Often, unsponsored will be exchanged for Level I depositary receipts.
Level I
Level 1 depositary receipts are the lowest sponsored shares that can be issued. When a company issues sponsored shares, it has one designated depositary acting 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 shares trade in the
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. It may still do so, but at its own discretion. If a company chooses to issue reports, it is not required to follow
Companies with shares trading under a Level 1 program may decide to upgrade their share to a Level 2 or Level 3 program for better exposure in the
Level II (listed)
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 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
The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a
While listed on these exchanges, the company must meet the exchange’s listing requirements. If it fails to do so, it will be delisted and forced to downgrade its ADR program.
Level III (offering)
A Level 3 depositary receipt program is the highest level a foreign company can have. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by
Setting up a Level 3 program means that the foreign company is not only taking some of its shares from its home market and depositing them to be traded in the
Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their
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
144-A
Some foreign companies will set up an ADR program under SEC Rule 144(a). 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).
No regular shareholders will have anything to do with these shares and most are held exclusively through the Depository Trust & Clearing Corporation, so the public often has very little information on these companies.
Regulation S
The other way to restrict the trading of depositary shares 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
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 shares can be merged into a Level 1 program after the restriction period has expired...
Some Major ADRs issued by Indian Companies :
Among the Indian ADRs listed on the US markets, are Infy (the Infosys Technologies ADR), WIT (the Wipro ADR), Rdy(the Dr Reddy’s Lab ADR), and Say (the Satyam Computer ADS)
What are Indian Depository Receipts (IDR) :
Recently SEBI has issued guidelines for foreign companies who wish to raise capital in
Though IDRs will be freely priced., yet in the prospectus the issue price has to be justified. Each IDR will represent a certain number of shares of the foreign company. The shares will not be listed in
The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companies and that too without the risk of investing directly which may not be too friendly. Thus, now Indian investors will have easy access to international capital market.
Normally, the DR are allowed to be exchanged for the underlying shares held by the custodian and sold in the home country and vice-versa. However, in the case of IDRs, automatic fungibility is not permitted.
SEBI has issued guidelines for issuance of IDRs in April, 2006, Some of the major norms for issuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit for the IDRs to be issued by the Indian companies. Moreover, the minimum investment required in the IDR issue by the investors has been fixed at Rs two lakh. Non-Resident Indians and Foreign Institutional Investors (FIIs) have not been allowed to purchase or possess IDRs without special permission from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good track record with respect to securities market regulations and companies not meeting the criteria will not be allowed to raise funds from the domestic market If the IDR issuer fails to receive minimum 90 per cent subscription on the date of closure of the issue, or the subscription level later falls below 90 per cent due to cheques not being honoured or withdrawal of applications, the company has to refund the entire subscription amount received, SEBI said. Also, in case of delay beyond eight days after the company becomes liable to pay the amount, the company shall pay interest at the rate of 15 per cent per annum for the period of delay.
