Definition
Depositary Receipts (DRs) are a type of negotiable financial equity or debt instrument used to represent foreign company’s publicly-traded securities. They are issued by a depositary bank and allow investors to hold shares in equity of other countries outside their own. DRs facilitate easier investment in foreign-based companies, thus mitigating several tax, legal, and corporate governance barriers usually faced when directly investing in foreign securities.
Types of Depositary Receipts
American Depositary Receipt (ADR) ADRs are the most well-known form of depositary receipt in the United States. They allow American investors to purchase shares in foreign companies in a US-based stock exchange like NYSE or NASDAQ.
Global Depositary Receipt (GDR) GDRs represent a bank certificate issued in more than one country for shares in a foreign company. In most instances, the shares represented by GDRs are traded on multiple exchanges around the world.
International Depositary Receipt (IDR) IDRs are depositary receipts traded in exchange markets outside the United States, typically in their home country’s market.
Examples
Alibaba Group Holding Ltd. (BABA) Alibaba is listed on the NYSE and offers American Depositary Shares (ADSs), each representing a number of underlying ordinary shares trading in Hong Kong.
Tata Motors Ltd. (TTM) Tata Motors is listed as ADRs on the NYSE, representing its equity shares trading in India.
Vodafone Group Plc (VOD) Vodafone provides ADRs offered on NASDAQ, aligning with its ordinary shares traded on the London Stock Exchange.
Frequently Asked Questions (FAQs)
Q1: What is the primary purpose of depositary receipts?
- The primary purpose of depositary receipts is to allow investors in one country to invest in foreign companies’ shares while trading conveniently on their local stock exchange.
Q2: How are ADRs and GDRs different?
- ADRs are traded on U.S. exchanges and are issued by U.S. banks, while GDRs can be traded on international markets and may be issued simultaneously in multiple countries.
Q3: Are dividends on DRs taxed?
- Yes, dividends received from DRs are typically subject to withholding tax from the country of the issuing company, but may also be subject to additional tax regulations based on the investor’s home country.
Q4: How are ADRs created?
- ADRs are created when a broker purchases shares in the foreign company and delivers them to a U.S. depositary bank. The bank then issues ADRs that correspond to these shares, which can be traded on U.S. stock exchanges.
Q5: Can DRs be converted back to the original foreign shares?
- Yes, DR holders have the option to convert their receipts back into the original foreign shares if needed, through a process handled by the depositary bank.
Related Terms
- Custodian Bank: A financial institution responsible for holding and safeguarding a company’s or individual’s financial assets.
- Dividend: A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.
- Foreign Exchange Market: A global decentralized or over-the-counter (OTC) market for trading currencies.
- Public Offering: The sale of securities to the public in the primary market.
Online References
Suggested Books for Further Studies
- “Depository Receipts: Markets and Trading” by Unsal Ozdogan and Robin M. Sidel
- “International Finance” by Keith Pilbeam
- “Global Investments” by Bruno Solnik & Dennis McLeavey
- “The ADR Handbook” by Jane McFarland
- “Multinational Finance” by Kirt C. Butler
Fundamentals of Depositary Receipts: International Business Basics Quiz
Thank you for exploring this comprehensive guide on Depositary Receipts. Continue to enhance your knowledge with the suggested resources and refine your understanding through our targeted quizzes!