Depository Receipts are financial instruments that allow a company

to expand its investor base in a foreign country or in other words,

allow investors in a country to purchase the shares of foreign
companies.
In order to align the trading price of the DR to customary price
levels in the domestic market, each DR represents a number of
underlying shares in the issuers home market. So for example, 1:10
means that 1 depository receipt or 1 depository certificate = 10
Ordinary Shares in the local company.

GDR- Global Depository Receipt (Traded in Frankfurt, Luxembourg

and London stock exchanges)
ADR- American Depository Receipt (Traded in NYSE, Nasdaq, OTC)
List of ADRs-GDRs

Unsponsored DRs- Unsponsored DRs are

issued by one or more depositaries in
response to market demand and have no
regulatory reporting requirements
Sponsored DRs- The issuer company will sign
an exclusive agreement with a depository
bank that will spell out the legal relationship
between the depository bank, the custodian
and the issuer company.

Level 1 ADRs- Level 1 depositary receipts are the

lowest level of sponsored ADRs that can be issued.
Level 1 shares can only be traded on the OTC market
and the company has minimal reporting requirements
with the U.S. Securities and Exchange Commission
(SEC) .
The company is not required to issue quarterly
or annual reports in compliance with U.S. GAAP.
However, the company must have a security listed on
one or more stock exchange in a foreign jurisdiction
and must publish in English on its website its annual
report in the form required by the laws of the country
of incorporation, organization or domicile.

Level 2 ADRs- Level 2 depositary receipt

programs are more complicated for a foreign
company. When a foreign company wants to set
up a Level 2 program, it must file a registration
statement with the U.S. SEC and is under SEC
regulation.
The advantage that the company has by
upgrading their program to Level 2 is that the
shares can be listed on a U.S. stock exchange.
These exchanges include the NYSE, NASDAQ and
the American Stock Exchange (AMEX).

Level 3 ADRs -A Level 3 ADR is the highest level a

foreign company can sponsor.
Because of this distinction, the company is required to
adhere to stricter rules that are similar to those
followed by U.S. companies.
Setting up a Level 3 program means that the foreign
company is not only taking steps to permit shares from
its home market to be deposited into an ADR program
and traded in the U.S.; it is actually issuing shares to
raise capital.

Rule 144a ADRs: Some foreign companies will set

up an ADR program under SEC Rule 144A. This
provision makes the issuance of shares a private
placement. Shares of companies registered under
Rule 144-A are restricted stock and may only be
issued to or traded by Qualified Institutional
Buyers (QIBs).US public shareholders are
generally not permitted to invest in these ADR
programs
The benefits for this type of ADR is that it allows
the issuer company to raise capital for the QIBs in
the US with out adhering to the strict regulations
required by Level 3 ADRs.

Access and Diversification: ADRs give investors access to

investments outside their own country. For eg. , Indian regulations
for example do not permit non-Indian nationals to invest directly on
the Sensex exchange. So the only way for US investors to invest in
Indian securities is through emerging markets funds or ADRs.
Liquidity: The liquidity of ADRs makes them attractive instruments
for U.S investors who wish to invest in companies outside their home
market.
Safety and Transparency: U.S investors have greater access to
company research, and price and trading information. Additionally
trading, clearing and settling of trades takes place in accordance to
U.S market regulations. Dividend payments are paid in $US and
corporate action notifications are made in English.
Comparability: U.S investors can easily compare U.S securities with
ADRs
Lower tax rates on dividends: Investors may benefit from lower tax
obligations on dividends made by issuers of exchange listed ADRs
in cases where there is a treaty between U.S and issuers local
market.

Access to capital and international exposure: Indian

companies can raise capital outside of India and broaden
their shareholder base. In doing so they can increase
liquidity of their stock and therefore its attractiveness.
Branding: Indian companies can raise their profile
internationally
Increase in local price: As a result of global demand, local
prices may increase.
M&A and corporate action activity: Increase merger and
acquisition activity by allowing the issuer to use ADRs as
acquisition currency. Additionally, ADRs facilitate the
execution of corporate actions such as dividend payments
and solicitation of votes.
Employee Compensation: Issuer companies may
compensate U.S employees with stock option plans which
will allow foreign companies to hire U.S talent.

Suppose a U.S. investor wants to buy a non-U.S. share, the

process would proceed as follows:1.

2.
3.
4.
5.

6.
7.

US investor contacts US broker and requests the purchase

of ADR. If no existing ADRs are available, new issuance
begins.
US broker contacts a local broker in the foreign country.
The local broker purchases local shares on local exchange.
Ordinary shares are deposited with a local custodian.
The local custodian instructs the depositary bank (eg Bank
of New York) in the US to issue ADRs that represent the
ordinary shares received.
The depositary bank issues ADRs and delivers them
through the DTC (Depository Trust Company).
The broker delivers the ADRs to the investor or credits the
investors accounts.

Once issued, these certificates may be freely

traded in the U.S. over-the-counter market or,
upon compliance with U.S. SEC regulations, on a
national stock exchange. When the Depositary
Receipt holder sells, the Depositary Receipt can
either be sold to another U.S. investor or it can
be canceled and the underlying shares can be
sold back. In the latter case, the Depositary
Receipt certificate would be surrendered and the
shares held with the local custodian bank would
be released back into the home market and sold
to a broker there.

The first ADR was issued by Infosys Technologies in 1999.

The first Indian bank to go for ADR issue was ICICI BANK and its
issue size was $315 million.
Infosys Technologies has taken the ADR route with the US public
offering of 1,800,000 ADRs at $34 each. The ADRs represent
9,00,000 equity shares and went public on March 11.
Infosys is the first ever India registered company to be listed in
the Nasdaq stock market in USA.
http://www.indiainfoline.com/MarketStatistics/GDR
http://www.sharekhan.com/stock-market/equity/companystatistics/statistics-details/ADR-GDR.htm

Suppose an Indian Mutual fund is holding 1000

ADRs of ICICI Bank.
As each ADR has two domestic shares as
underlying, mutual fund holding is equal to 2000
shares.
Let us on a given day, Each ADR is quoting at USD
36.55. (INR46.15/USD.) Each ADR is trading at INR
1687.
Suppose ICICI Bank is quoting at Rs. 998 on that
day. Value of two domestic shares is INR 1996.
NPTEL , International Finance

Compared the ADR and domestic closing

prices from January 2001 to October 2010 of
Infosys.

Source - International Capital Flow and Portfolio

Diversification through Depository Receipts

Figure 5: Difference Between Infosys Share Price and ADR Price

(in INR)
200.0

-600.0
-800.0

Figure 6: Infosys ADR Average Daily Trading Volume

4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

19/01/2001

15/06/2001

7/11/2001

2/4/2002

14/08/2002

6/1/2003

3/6/2003

16/10/2003

5/3/2004

26/07/2004

13/12/2004

5/5/2005

22/09/2005

16/02/2006

7/7/2006

21/11/2006

17/04/2007

31/08/2007

17/01/2008

11/6/2008

3/11/2008

31/03/2009

20/08/2009

13/01/2010

-400.0

8/6/2010

-200.0

21/10/2010

0.0

Significant price difference between ADR

prices and Infosys share price, at least during
earlier part of the study period can be due to
the fact that Indian DRs did not offer two-way
fungibility.
The government of India permitted two-way
fungibility in 2001-2002 union budget.

Two-way fungibility allows investors both

FIIs as well as domestic, to freely convert DRs
into underlying shares and also reconvert back
the domestic shares into DRs. Two-way
fungibility is an important requirement for
LOOP (law of one price) to hold true.

In one-way fungibility, DR investors could

convert these to underlying shares but can not
reconvert back to DRs thus affecting the
liquidity in DR market.

The high demand for Indian Share in US

during past few years and relatively low
volume of ADR available resulted in most
Indian ADR trading at a relatively higher
value. (Until two way fungibility)
Investors Perception Wipro and Infosys
were doing very well Technological
companies Same field