Understanding IDR, GDR, and ADR in the Global Financial Marketplace

The concept of depository receipts (DRs) has gained significant importance in the global financial marketplace, offering companies and investors a flexible and secure way to engage in cross-border transactions. This article delves into the intricacies of Indian Depository Receipts (IDRs), Global Depository Receipts (GDRs), and American Depository Receipts (ADR), providing a comprehensive understanding of how these financial instruments function and their benefits.

What are Depository Receipts?

Depository receipts (DRs) are financial instruments that represent ownership in the shares of a foreign company. These receipts allow the shares to trade in a local market, denominated in a local currency, making them an attractive option for both companies and investors looking to enter international markets.

The Process of Issuing Depository Receipts

The process of issuing a depositary receipt involves several steps:

Step 1: Company/Investor Submission - A specific quantity of equity shares is delivered to a bank. Step 2: Custodian Account Storage - The bank stores the securities in its custodian account in the country of the company's domicile. Step 3: Issuance of Depositary Receipts - The bank issues a certificate representing the shares to investors in the overseas market.

DRs can be sponsored, meaning that the issuing company initiative the process, or unsponsored, where an investor submits the shares. Sponsored DRs can be listed on exchanges where the receipts are issued, with stringent requirements, while unsponsored DRs typically trade in over-the-counter (OTC) markets with fewer regulatory requirements.

Two-Way Fungibility of DRs

DRs often feature two-way fungibility, subject to regulatory provisions. This allows investors to buy shares in the local market and convert them into DRs for trading in a foreign market. Conversely, DRs can be bought and converted into the underlying shares, which trade on the domestic stock exchange.

Types of Depository Receipts

Indian Depository Receipts (IDRs)

IDRs are depository receipts issued and traded in the Indian market by a non-Indian company. According to SEBI guidelines, Indian companies are allowed to raise foreign currency resources through the issuance of IDRs, and foreign companies can raise equity capital from India. SEBI has laid down detailed guidelines, including limits on the funds raised, one-year lock-in on conversion, and solely resident Indian investors' eligibility.

Global Depository Receipts (GDRs)

GDRs are depository receipts that can be traded in multiple countries, with a preference for issuance in the European Union due to the commonality of regulatory standards. GDRs offer companies a wider investor base, enabling investors to invest in international stocks with ease.

American Depositary Receipts (ADRs)

ADRs are depository receipts issued and traded in the United States by non-US companies. ADRs have been popular for decades, with many worldwide companies issuing them. Notable Indian companies that have issued ADRs include Infosys, Wipro, ICICI Bank, and HDFC Bank. The American exchanges have allowed ADRs since the early 20th century, positioning them as one of the most evolved markets for these financial instruments.

Hong Kong Depository Receipts (HKDRs)

HKDRs are depository receipts issued by non-Hong Kong companies and traded in the Hong Kong market. These receipts provide a way for companies to raise funds in Hong Kong, allowing investors to invest in companies from other regions.

The Benefits of Depository Receipts

Depository receipts provide several benefits, including:

Access to international markets for companies. Access to diverse investor bases for companies. Allowing investors to invest in international stocks through domestic exchanges, reducing administrative barriers. Providing a mechanism for companies to raise foreign currency resources.

However, it is important to note that holding DRs grants investors the right to dividends and capital appreciation from the underlying shares but no voting rights. Currently, the issue of voting rights to DR holders is under consideration by the Securities and Exchange Board of India (SEBI).

Conclusion

In conclusion, depository receipts, including IDRs, GDRs, and ADRs, play a crucial role in the global financial market, facilitating cross-border investments and access to international markets. Companies and investors should meticulously understand the regulatory requirements and processes associated with these instruments to maximize their benefits.