Thursday, May 7, 2009

ADRs and GDRs

Indian companies are permitted to raise foreign currency resources through issue of ordinary equity shares through depository receipts, namely, Global Depository Receipt(GDRs)/American Depository Receipts (ADRs) to foreign investors i.e. institutional investors or individuals (including NRIs) residing abroad.
A depository receipt (DR) is any negotiable instrument in the form of a certificate denominated in US dollars. The certificates are issued by an overseas depository bank against certain underlying stock/shares. It is non-voting equity holding. One of the basic advantage of DRs is facilitation of cross border trading and settlement, minimized transactions costs and broadened potential base, especially among institutional investors.
An American Depository Receipt (ADR) is a negotiable U.S. certificate representing ownership of shares in a non-U.S. corporation. ADRs are quoted and traded in U.S. dollars in the U.S. securities market.
I found out some of the important advantages of ADR:

1. ADRs allow you to diversify your portfolio with foreign securities easily.
2. ADRs trade, clear and settle in accordance with U.S. market regulations and permit prompt dividend payments and corporate action notification.
3. If an ADR is exchange-listed, investor also benefits from readily available price and trading information.
Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering. GDRs may be used in either the public or private markets inside or outside the US. GDR, a negotiable certificate usually represents a company’s publicly traded equity or debt. ADRs and GDRs are identical from a legal, operational, technical and administrative standpoint. The word ‘global’ denotes receipts issued are on a global basis that is to investors not restricted to US.

There are many more technicalities relates to ADR and GDR relating them to Arbitrage and other instruments. These all will be discussed in upcoming posts.