Depository Receipt

Definition of a Depository Receipt

A Depository Receipt (DR) is a negotiable financial instrument issued by a bank or depository institution to represent a foreign company’s publicly traded securities. The primary function of a DR is to provide investors with access to foreign markets through domestic exchanges, circumventing the complexities of trading in foreign securities. Depository Receipts offer a convenient way for investors to diversify their investment portfolios while dealing with familiar regulatory environments.

Each Depository Receipt represents a specific number of shares in the foreign company, and the dividends and other benefits from those shares are paid in the investor’s local currency.

Examples of Depository Receipts

1. American Depositary Receipt (ADR): A DR specifically tailored for the U.S. market, allowing American investors to buy shares in foreign companies through U.S. exchanges. For example, a Japanese Electronics Company may issue ADRs that are traded on the NYSE.

2. Global Depositary Receipt (GDR): A type of DR used across multiple countries, including European and U.S. markets. For example, a European pharmaceutical company may issue GDRs that are listed on London and Luxembourg stock exchanges.

3. Brazilian Depositary Receipt (BDR): Brazil-specific DR issued by a Brazilian bank, which represents securities from non-Brazilian firms.

Frequently Asked Questions

What is the primary purpose of a Depository Receipt?

The primary purpose of a Depository Receipt is to facilitate the investment in foreign securities by providing a financial instrument that trades on a local exchange in the investor’s home country.

How do Depository Receipts benefit investors?

Depository Receipts benefit investors by simplifying the process of investing in foreign companies. They eliminate much of the complexity, such as dealing with foreign exchanges and currency, and expose investors to potentially high-growth markets.

Do Depository Receipts pay dividends?

Yes, Depository Receipts pay dividends analogous to the underlying foreign shares, although the payment is made in the investor’s local currency.

How are Depository Receipts regulated?

Depository Receipts are regulated by the securities laws of the country in which they are traded. In the U.S., for instance, ADRs are regulated by the Securities and Exchange Commission (SEC).

Are there tax implications for holding Depository Receipts?

Yes, there can be tax implications, including foreign withholding taxes on dividends and capital gains taxes in the investor’s home country.

Related Terms with Definitions

• American Depositary Receipt (ADR): A type of Depository Receipt issued in the U.S. representing a specified number of shares in a foreign company.
• Global Depositary Receipt (GDR): A depository receipt that can be sold in multiple international markets outside the issuer’s home country.
• Custodian: An institution that holds and safeguards the physical securities underlying the Depository Receipts.

Online Resources

1. Investopedia - Depository Receipt
2. SEC - American Depositary Receipts

Suggested Books for Further Studies

1. “ADR’s & Foreign Stocks: Mercedes To Matsushita” by Richard J. Teweles
2. “The Complete Guide to Currency Trading & Investing” by Jamaine Burrell
3. “Investing in Shares For Dummies” by David Stevenson

Accounting Basics: “Depository Receipt” Fundamentals Quiz

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