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A DR is a type of negotiable (transferable) financial security traded on a local stock exchange but represents a security, usually in the form of equity, issued by a foreign, publicly-listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of DRs is the American depository receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s.
Since then, DRs have spread to other parts of the globe in the form of global depository receipts (GDRs). The other most common type of DRs are European DRs and International DRs. ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in US dollars, but can also be denominated in Euros.
What are Indian Depository Receipts (IDRs)
IDRs are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India.
How are IDRs different from GDRs and ADRs
GDRs and ADRs are amongst the most common DRs. When the depository bank creating the depository receipt is in the US, the instruments are known as ADRs. Similarly, other depository receipts, based on the location of the depository bank creating them, have come into existence, such as the GDR, the European Depository Receipts, International Depository Receipts, etc. ADRs are traded on stock exchanges in the US, such as Nasdaq and NYSE, while GDRs are traded on the European exchanges, such as the London Stock Exchange.
How do DRs work
DRs are created when a foreign company wishes to list its securities on another countrys stock exchange. For this, the issuing company has to fulfil the listing criteria for DRs in the other country. Before creating DRs, the shares of the foreign company, which the DRs represent, are delivered and deposited with the custodian bank of the depository creating the DR. Once the custodial bank receives the delivery of shares, the depository creates and issues the DR to investors in the country where the DRs are listed. These DRs are then listed and traded in the local stock exchanges of the other country.
PARTIES INVOLVED
DEPOSITORY BANK
Located in the country of ADR issuance. (Here, USA). The depository bank is the ultimate issuer of the DR’s on a local exchange.
CUSTODIAN BANK
Located in the country from where the shares have originated. (Here, Japan). The depository bank, sitting in the USA chooses the custodian bank.
BROKER
A broker undertakes to oversee the entire process from inception to issuance. He is usually located in the country of ADR issuance.
FOREIGN STOCK EXCHANGE
The exchange ultimately listing the ADR’s. .
