S O U R C E S OF

IN T E R N A T IO N A L F IN A N C E :
ADRAND GDR
-
/ Am eric an Dep osit ory Rec eip ts (ADRs) : Intr odu
ctio n
/ Def init ion s of AD Rs
/ Features or Characteristics of ADRs
/ Types of AD Rs
/ Lev els of AD Rs
/ Termination or Cancellation of ADR
/ Adv ant age s of AD R
/ Dis adv ant age s of AD Rs
/ Working of AD Rs
/ Global Dep osi tor y Rec eip t (GDR) : Intr odu ctio
n
/ GDR Me cha nism
/ Adv ant age s of GD R
/ Dis adv ant age s of GD R
/' Dif fere nce bet wee n AD R and GD R
 ----------- ~------------ ,

In 8.21 Sources of /ntematlonal Finance : ADR

•nt1 Golt

-~ AMERICAN DEPOSITORY RECEIPTS (ADRs) ~ INTRODUCTION

American Depository Receipt (ADR) is a negotiable security that represents 5ecuriti
company that trades in the US financial markets. Shares of many non-US companies are tradectes of ~
stock exchanges through ADRs, which are denominated and pay divid~ds in US. Dollars an:n lJs
be traded like regular shares of stock. ADRs are used by many non-US issuers as a means of r .~ay
capital from US. ADRs are actually certificates issued by depository banks giving ownershi aisl?\g
certain number of shares of a non-US company. The certificates could possibly be traded on th p of ~
e tna·
US stock exchanges depending on the details of the deal, whereas some ADRs can only be trad Jor
over-the-counter markets. The ADR was firstly created by J.P. Morgan in the year 1927 in ed _Ot\
Americans were allowed to invest in Selfridge's shares which is a British department store. Which

~ DEFINITIONS OF AMERICAN DEPOSITORY RECEIPTS (ADRs)

"American Depository Receipt (ADR) is a negotiable certificate, issued by a US bank

denominated in US Dollar representing securities of a foreign com~any trading in the US stack
market. The receipts are a claim against the number of shares underlymg. ADRs are offered for saI
to American investors. By way of ADR, the US investor can invest in non-US companies. 1he
dividend is paid to the ADR holders is in US Dollars." e
"American Depository Receipts (ADRs) are the stocks of foreign companies which are traded.
the American markets and are purchased by the investors in US dollars during the normal tracfinin
hours in the US market thro~gh the brokers which allows the people of America to invest !
foreign companies."

·-P FEATURES OR CHAru\[Link] OF AMERICAN DEPOSITORY

RECEIPTS (ADRs)
Denomination

Investors

Depository Bank

Approval

Dividend

1. Denomination : American Depository Receipts (ADRs) are denominated only in US dollars.

2. Investors : American Depository Receipts (ADRs) are only issued to investors who are
American residents.
 tnternstlonsl Finance : ADR snd GDR
• tH!SS 0 f
So"'"'
pepository Bank: The depository bank which issues ADRs should t,e [Link] in L'S..
3.
J\pproval : The approval of Securities and Exchange Commission (SEQ of liS n~s fO tie
4
• obtained for issuing ADR.

Dividend : InveS tors who purchase ADRs are paid dividends in L'S dollars. The f'-")reign
5
• bank pays dividends in the native currency, and the dealer /broker distributes the dividends
ill US dollars after factoring in currency conversion costs and foreign taxes.

fYPES OF AMERICAN DEPOSITORY RECEIPTS (ADRs)

,'

Sponsored ADA

.Type~ of AD Rs_ -

• Non-Sponsored
- ADR

1. Sponsored ADR
The foreign company issuing shares to the public enters into an agreement with a US depository
bank to sell its shares in US markets to create a sponsored ADR. The record keeping, sale and
distribution of shares to public, distribution of dividend etc. is the responsibility of the US bank.
Sponsored ADRs can be listed on the US .stock exchanges. Hence, sponsored. ADRs are issued by US
bank on behalf of the foreign company where there exists the legal arrangement between the two
parties. The transactions with investors will be handled by the bank while cost of issuing ADRs and
control of ADR will be of foreign company.

2. Unsponsored ADR
An unsponsored ADR is created by brokers or dealers without the cooperation of the foreign
-company issuing the shares. Unsponsored ADRs are>treated in US over-the-counter markets without
requiring registration with Securities and Exchange Commission (SEC). A bank issues unsponsored
ADR according to the demand in the market where the foreign company under consideration has no
participation or formal or legal agreement with the depository bank. The establishment of an
llnSponsored ADR is driven by broker.
 me.41 Sources ol lntematlonal Rnance : AD
R anflG
0~
/ LEVELS OF A S (ADRs)

Sponsored Sponsored Sponsored

Level-I ADRs Level-II ADAS level-Ill ADRs

1. Sponsored Level I ADRs

It is the lowest level at which sponsored ADRs can be issued. It is the most common lev
foreign companies that do not qualify for other levels or that do not want their securities listed ~ f~,
0
exchanges. This level of ADRs is subject to the least reporting requirements with Securities us
Exchange Commission. Sponsored Level 1 ADRs are only traded over the counter. The companiesand
not needed to issue quarterly or annual reports like other publicly-traded companies. However Leare
1 issuers must have their stock listed on one or more exchanges in the country of origination. ' Ve}

2. Sponsored Level II ADRs

Level II ADRs have more requirements from the Securities and Exchange Commission (SEq than
Level I. The issuing company gets an opportunity to set up a higher trading presence on the US stock
markets. The company must file a registration statement with SEC alongwith file form-20-F in
accordance with the IFRS standards. Form 20-F is the equivalent of Form-lOK which is submitted b
US publicly traded companies. The company may be delisted or downgraded to Level 1 if it fails t~
comply with these requirements.

3. Sponsored Level Ill ADRs

Level mis the highest and most prestigious level that a foreign company can sponsor. A foreign
company can float a public offering of ADRs to raise capital from American investor through US
exchanges at this level. Level ill ADRs also attract stricter regulations from the SEC. The Company
must file Form F-1 (prospectus) and Form 20-F (annual reports) in accordance with IFRS standards.
Any materials distributed to shareholders in the issuer's home country must be submitted to the SEC
asForm6-K.

/ TERMINATION OR CANCELLATION OF ADR

ADRs are subject to cancellation at the discretion of either the foreign issuer or the depository
bank that created them. The termination results in the cancellation of all ADRs issued and delisting
from the US exchange markets where the foreign stock was trading. The company must write to the
 atlonsl Finance : ADR and GDR
,ot/n tsrn _a .s,
go,,rt:6 f j\DRs, giving them the option to swa p their
ADR for foreign securities represenlro by the
wf\ers o the termination.
o . ts before
reee1P
VANTAGES/UTILITIES OF ADRs
/~p-~--------
1 Access o f ~
I
-1 Merger and Acquisition I
,.-1 Easy to Use I

Adva ntag es
of _-u=s=w=_o_rki=·-n_g==================='
ADR
·I
I_,..
Accessibilily of Research and lntonnallon I
~ Cost Effective
I
Liquidity

Protection

L-------------------
1. Access to· Cap ital : The issuer of the ADRs
can get access to the capital available in the
market of the US and get the diversified base of US
shareholders.
2. Merger and Acq uisi tion : ADR makes is easy for the issuer to go for merger and acqu
activities as they can use ADR as the currency for isition
the acquisition.
3. Easy to Use : ADRs are easy to use for
the investors as they can purchase and sell the shar
of the other cou ntry 's com pan y like their own coun es
try company. There is no need for a new
broker or to ope n a foreign brokerage account
as investors can use the same broker with
whom they normally deal.
4. Diversification : An inve stor gets the opp
ortunity to diversify their investment portfolio on
a global scale.
5. US Working : Eve ryth ing is don e as
per the US working. ADRs are bou ght by the inve
in US dollars, divi den ds are give n in dollars, stors
trad ed duri ng the normal trading hours in the
us.
6. Accessibility of Res earc h and Info rma
tion : ADRs give mor e accessibility of research and
information to the investors. Investors can customi
ze their portfolio according to their needs
like which countries they are inte rest ed in or whi
ch sector etc.
7• Co5t Effective
: ADRs are an easy and cost-effective way to
purchase shares in a foreign
[Link] Sources of International Finance : AD
RalJdG
company. They save money by reducing administration costs and avoiding foreign Ofl
each transaction. ~es Of\
8. liquidity : The investors can convert ADRs into cash anytime by selling ADRs
prices in US market as Level II and Level Ill ADRs are listed in New York Stoel( ;; <tllo~
NASDAQ and American Stock exchange. Level I ADRs are traded in over th th¾ge,
e CQ11..
market in US. "''let
9. Protection: Most of ADRs are registered with Securities and Exchange Conuniss•
SEC ensures that the interest of US investors is protected. All issuing companj~~(Stc:i.
comply with registration and reporting requirements of SEC. ave to

,<1 DISADVANTAGES OF ADRs

INo Com~iance

Disadvantages ~ - - - - i Limited Options

of ADRs .·

I Lack of Diversified Portfolio I

1. No Compliance : The unsponsored ADRs may not be complaint with the Securities and
Exchange Commission.

2. Limited Options : The investors might have limited companies for the section as all the
foreign companies are not available as ADRs.
3. Lack of· Diversified Portfolio : An investor requires enough capital investment for the
purpose of diversification otherwise it will not be possible to create a properly diversified
portfolio.

/ PROCEDURES Of ADRs
Investors willing to invest in ADRs can buy them from brokers or dealers. The brokers and
dealers get ADRs by purchasing already issued ADRs in the US financial markets or by creating a
new ADR. Already issued ADRs can be purchased from NASDAQ or New York Stock Exchange
creating a new ADR involves purchasing the stocks of the foreign company in the issu~r's home
market and depositing the purchased shares in a depository bank in the overseas market. The bank
then issues ADRs that are equal to the value of the shares deposited with the bank. The broker or
dealers takes the ADRs to US financial market to sell them. The decision to create an ADR depends
upon the pricing, availability and demand.
Investors who buy ADRs paid dividends in US dollar. It makes easy for US investors to invest in a
foreign company without worrying about currency exchange rates. The US banks that deal with
 tem•tlonsl Fina nce : ADR snd GDR ma .11
_., 0 11n
50ur- •
the foreign com pan ies to prov ide them with thei r fina
ncial [Link]. whi <h ir\"· ~hJI "$
iOF-5 ask ecide the financial heal th of the com pan
y.
otillZe to d

GLOBAL PE~OSITORY RECEIPTS (GDR)

: INTRODUCTION
~

oomestlc Company

Depository Agreement
Cus1oclan
Agreemenc

overseas Depository ~-Jo

Global Oeposit~ry Re:eipt ~GDR) is a negotiabl

e_ inst
cliff ent nations with a single instrument. The receipts rument used to tap the financial markets of
are issu ed by the depository bank, in more
erone country representing a fixed number of
than nvert than into shar es in a foreign company. The holders of GOR
shares by surrendering the receipts to the ban
canco • In k. The prior approval of Ministry
pjnance and FIPB (Foreign vestment Promotio • n Boa .
rd) 1S taken by the company plan ning for the
:!ue of GDR. Global Depository Receipt (GDR)
is a negotiable inst rum ent all over the world.
GDRs are usually ~u ed to institutional investor
s. Hence, A Global Depository Receipt (GDR)
:es· similar to American Depository Receipt (AD
in a foreign company, suc h that a foreign bran
Issue of GDR is one of the mos t pop ular ways
R). It is a type of ban k certificate that represen
ch of an international ban k then hold s the shar
to tap the global equity markets. A company
is
ts
es.
foreign currency fun ds by issuing equity shares can raise
in a foreign country.

✓ GLOBAL DE PO SIT OR Y RE CE IPT

PROC~DURE
1. The domestic com pan y enters into an agre
ement wit h the overseas depository ban k for
purpose of is~ue of GDR. the
2. The overseas dep osit ory ban k then enters
into a custodian agreement with the domesti
custodian of suc h company. c
3. The domestic cus todi an hol ds the equity sha
res of the company.
4. The overseas dep osit ory ban k issues sha
res to foreign investors on the instruction
domestic custodian. of
5. The whole process is per form ed und er stric
t guidelines.
6. GDRs are generally den omi nate d in US doll
ars.
[Link] Sourc,, of lnt,matlona/ Fina
nce:AoR
•rte1 0
,, ADVANTAGES/UTILITIES OP GDR °'l

,I Market Access
~~
Trading In More Countries
]
Global Presence
]
Liquidity
]
Growth Opportunities
]
Enhanced Valuation
]
Investment Option
]
Freely Transferred

Investment by Institutional Investors ]

Increased Base
]
Tax Saving
l
1. Market Access : Global Depository Receipt providers access to foreign capital markets to
the issuing companies.
2. Trading in More Countries : A domestic company can get itself registered on an overseas
stock exchange or over the counter and its shares can be traded in many countries.
3. Global Presence : GDR expands the global reach of the company. It assists in getting
internation coverage and attention.
4. Liquidity : GDRs are liquid in nature. They are based on demand and supply which can be
regulated. GDR can be converted in cash easily.
5. Growth Opportunities: GDR provides companies in emerging markets with opportunities
for rapid growth and development.
6. Enhanced Valuation : The valuation of shares in the domestic market increases on listing in
the international stock market.
7. Investment Option : The non-resident can invest in the shares of the foreign company with
the help of GDR.
8. Freely Transferred: GDR can be freely transferred.
 , ,nstlo nal Finance : ADR and GDR
•of•"16 m ul
gollre- . .
Jnvcstroent by ln s [Link] ~nal lnvc:~lor.i : Foreign institution.11
investors c:an pun: l'u~ the
9. shares of comp any issuing GDR in their country even if
they are restri<ta'I ro run:h ,l~
shares of foreign company.
Jncreased B~se : G~obal Depository Receipt increases the shareh
10• GOR makes it oldeTS b-ase of the Cl:'mr,.1ny•
pos5 ible for companies to reach and tap international markets.
'fax savin g ~ GDR sa~es the taxes of an investor. An investor
11 • buys share would need to PJY tat"< if he
s m the foreign company whereas in GDR same is not the case.

/ ptSADVANTAGES OF GDR

Expensive

Beneficial to Hgl Net-Worth hwestors

VolabTlty in Forex Market

High Regulation

No Voting Rights

1.
Expensive : GDR is one of the expensive sources of finance.

2. Beneficial to High Net-W orth Inves tors: GDR is mostly beneficial only to High Net-W orth
indiv idual inves tors due to their capacity to invest high amou nt
in GDR.
3 Vola tility in Forex Mark et : Dividends on GDR are paid in domestic coun try's curre ncy
_
which is subject to volatility in the forex market.

4. High Regu lation : GDR becomes subject to regulation for multi ple financial regul ators since
it is issue d in more than one country. Companies may have
to face huge consequences for
evei.. a smal l mista ke.
s. No Votin g Righ ts : Unde r the mech anism of GDRs, the share
s of a comp any are sold in
bulk to an inter medi ary in anoth er coun try who furth er secur
itizes them into GDRs. Hence,
the votin g right s in the comp any are retain ed by the interm
ediar y who has directly
purch ased the share s and not by inves tors who purch ase the
GDR.

/I DIFFERENCE BET WE EN ADR AND GD R

Basis ADR GDR
[Link] ADR is an abbreviation for American GDR is an acronym for Global Depository
Depository Receipt. Receipt.
ma.101 Sources ol lntemstlonal Finan
ce: AoRa
--- --- --r
ADR
--- --- --- --- .-- .-- - ~Q
[Link] is a depository receipt issued by a US GDR is a negotiable instr-um ~
depository bank against a certain number the international d E!nt i¾i
. ~ i.,_
of shares of non-US company stock, representing foreign cornepository ~~7
trading in the US stock exchange. is offered for sale in
market.
!:~s stac~"'~
in ter-na ti th~t
~
3. Relevance Foreign companies can trade in US stock GDR helps foreign
cornp .
market with the help of ADR through country's stock
market anies
th to trade .
various bank branches. branches. rough OD~
4. Issued ADRs are issued in America. GDRs are issued in rnore th I
country. an on,
S. Listed ADR is listed in American Stock Exchange GDR is listed in non-US
st~
i.e. New York Stock Exchange (NYSE) or like London Stock Exchange et/Xchan
ges
National Association of Securities Dealers
Automated Quotations (NASDAQ)
6. Negotiation ADR can be negotiated in America. GDR can be negotiated in all ar 1

world. ound th
e
[Link] ADR market is a retail investor market. GDR market is a market for ins
~
The investors' participation is large. It investors with less liquidity. tiona1
offers a proper valuation of stock of
company.

/ CONDITIONS FOR ISSUE OF DEPOSJTORV RECEIPTS

1. The Board of Directors of the company intending to issue depository
receipts shall pass a
resolution authorizing the company to do so.
2. The company shall take prior approved of its shareholders by a
special resolution to be
passed at a general meeting.
3. The depository receipts shall be issued by an overseas depository
bank appointed by the
company and the underlying shares shall be kept in the custody of a
domestic custodian
bank.
4. The company shall ensure that all the applicabl~ provisions of the
scheme and the rules or
regulations or guidelines issued by RBI are complied with before and
after the issue of
depository receipts.
5. The company shall appoint a merchant banker or a practising charter
e~ accountant or
practicing cost accountant or practising company secretary to oversee
all the compliances
relating to issue of depository receipts and the compliance report taken
from such merchant
banker or practising CA, CS as the case may be, shall be placed at the meetin
g of the BOD of
the company or of the committee of the Board of Direct~rs authorized
by the Board in this
regard to be held immediately after closure of all formalities of the
issue of depository
receipts.
ques tioflS carr Y s ri,ii,:JjJ,; :••
Write a note on American Depository Receipts (ADRs). (PU 2015 Nov.)
1.
axplain the difference between ADR and GDR. (PU 2018 Nov.)
2. 9.9':~~~----------------i;
ques tioflS carr y 15.~pa.,:/{i~r:;-·.
W}lat is the utility of raising money through GDRs ? Discuss the procedure
1• funds throug of raising
h GDRs. (PU 2015 Nov.)
What is the need for International Finance ? Discuss the sources for mobilizing
2. . finance
from other countries. (PU 2016 Nov.)
I)isc1lSS in detail variou s sources of international finance. Also
3• which discuss the extent to
these sources have been tapped by the users in India in meeting their financi
al
need·
(PU 2017 Nov.)
,. Explain the proced ure for issue of GDRs and ADRs. Also explain the main
types of
.American Depository Receipts. (PU 2019 Nov.)
s. Define ADR. What are the advantages and disadvantages of ADRs.
. Define GDR. Explain its advantages and disadvantages:
6

000

'
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•