In this article we will discuss about the similarities and benefits of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
Issue of ADRs and GDRs:
Depository Receipts (DRs) are a type of negotiable (transferable) financial security that can be traded on a local stock exchange, representing ownership of shares in companies of other countries.
As a part of globalizing the economy, the government undertook two major steps – that of allowing Foreign Institutional Investors (FIIs) to invest in the Indian capital market and permitting Indian companies to float their stock in foreign markets.
An Indian company can raise finances from other countries investors by issue of any of the instruments like American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
An ADR is a stock which can be traded in the United States, representing a specified number of shares of a foreign company.
ADRs are bought and sold on the American stock exchanges.
A foreign company might make an issue in U.S. by issuing securities through appointment of U.S. bank as depository.
By keeping the securities issued by a foreign company, the U.S. bank will issue receipts called American Depository Receipts (ADRs) to the investors.
It is a negotiable instrument recognizing a claim on foreign security.
Depository receipts that are traded on the stock exchanges in other parts of the globe are called ‘Global Depository Receipts’ (GDRs).
These are commonly listed on European stock exchanges, such as the Luxembourg and London stock exchanges or on the Asian stock exchanges such as the Dubai and Singapore stock exchanges.
The issue of ADRs/GDRs are governed by the provisions of the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.
Similarities of ADRs and GDRs:
Except the difference as above, ADRs and GDRs have the following similarities:
1. Both ADRs and GDRs are usually denominated in US dollars.
2. Though the ADR/GDR is quoted and traded in dollar terms, the underlying equity shares are denominated in rupees only.
3. Instead of issuing in the names of individual shareholders, the shares are issued by the company to an intermediary called the ‘depository’, usually in overseas depository bank, in whose name the shares are registered.
4. It is the depository, which subsequently issues ADRs/GDRs to the subscribing public.
5. The physical possession of the equity shares will be with another intermediary called the ‘custodian’.
6. The custodian will act as an agent of the depository.
7. Though ADRs/GDRs represents the company’s shares it has a distinct identity and does not figure in the books of the company.
8. The shares usually correspond to the ADR/GDR in a fixed ratio.
9. The ADRs/GDRs could be issued in a negotiable form.
10. The ADRs/GDRs can be redeemed at the price of the corresponding shares of the issuing company ruling on the date of redemption.
11. The holder of ADR/GDR can transfer the instrument as in case of domestic instrument and also entitled for dividends as and when declared.
12. The ADR/GDR holder can ask the bank for the original foreign security by exchanging the ADR/GDR.
13. Both are negotiable instruments, their holders are entitled to corporate benefits such as dividend, bonus shares and rights issues.
14. The holders of both the instruments may exercise their vote through the Overseas Depository Bank (ODB).
15. Both can be sold outside India in their existing form. The underlying shares arising after redemption can be sold in India.
16. Sale of both outside India to nonresidents is not taxable in India.
17. Redemption of both into underlying shares is tax-exempt in India.
18. Dividend income received by ADR holder or the holder of underlying shares is not taxed in their hands.
19. After the transfer of shares, where consideration is in terms of rupee payment, the normal tax rates would apply to the income arising or accruing on these shares.
20. ADRs are listed on an American Stock Exchange, where as all GDRs are listed in a stock exchange other than American Stock Exchange, say London or Luxemburg.
21. The disclosure requirements for GDR issues are less stringent.
Benefits of ADR/GDR Issue:
To Indian Company:
1. Better corporate image both in India and abroad which is useful for strengthening the business operations in the overseas market.
2. Exposure to international markets and hence stock prices in line with international trends.
3. Means of raising capital abroad in foreign exchange.
4. Use of the foreign exchange proceeds for activities like overseas acquisitions, setting up offices abroad and other capital expenditure.
5. Increased recognition internationally by bankers, customers, suppliers etc.
6. No risk of foreign exchange fluctuations as the company will be paying the interest and dividends in Indian rupees to the domestic depository bank.
7. The issuer company collects the issue proceeds in foreign currency and thus able to utilize the same for meeting the foreign exchange component of project cost, repayment of foreign currency loans etc.
8. Large amount can be raised in the global market without much of a problem.
9. The issue proceeds may be retained outside India and used for approved end uses like import of capital goods, repayment of ECBs, purchase of plant and equipment etc.
To Overseas Investors:
1. Assured liquidity due to presence of market makers.
2. Convenience to investors as ADRs are quoted and pay dividends in U.S. dollars, and they trade exactly like other U.S. securities.
3. Cost-effectiveness due to elimination of the need to customize underlying securities in India.
4. Overseas investors will not be taxed in India in respect of capital gains on transfer of ADRs to another nonresident outside India.
5. The identity of ADR/GDR holders is kept confidential since they are freely transferable.
6. Quick settlement of ADRs/GDRs due to the existence of international systems like Euroclear and Cedel in Europe and the Depository Trust Company in the U.S.
7. ADRs/GDRs are designated in foreign currency, which is acceptable to global investors.
8. Global investors/holders of ADRs/GDRs don’t need to be registered with SEBI.