Monday, February 9, 2015

ADR and GDR

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Depository Receipts (DR)
A publicly listed (stock exchange listed) company might want to raise money from foreign countries (in contrast to its domestic country). So it will list its securities (stocks or equities) to a foreign country's stock exchange in form of Depository Receipts (DR).

Therefore, DRs are a type of negotiable financial security (usually stocks/equity) by a foreign publicly listed company, which are traded on a local Stock exchange (e.g., american company trading on Bombay Stock Exchange).

Example -
An American company (publicly listed in New York Stock Exchange, or any other stock exchange in USA) might want to raise money from foreign countries (like, India). So, it will list its securities in Indian stock exchanges (may be Bombay Stock Exchange) by means of Depository Receipts. Then Indian investors can invest in these securities.

American Depository Receipts (ADR)
Depository Receipts were first started in USA in late 1920s. DRs issued by any company of USA/America will be known as American Depository Receipts (ADR). ADRs, generally, are traded in US Dollar.

Global Depository Receipts (GDR)
DRs became popular in other parts of the world after its introduction in USA. DRs of all other countries (other than USA) will be known as Global Depository Receipts (GDR).


Issuance of DRs
When a foreign company intends to list its securities on another country's stock exchange, it goes through DR mode. Steps -
  1. The shares of the foreign company (which the Depository Receipts represent) are delivered and deposited with the custodian bank (bank that facilitates the company's DR)
  2. On receipt of the delivery of shares, the custodian bank creates Depository Receipts (DR) and issues to investors in the country (investor's country, not company's country)
  3. These DRs are then listed and traded in the local stock exchange of that country.


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