What are Depository receipts?

What are Depository receipts, Indian Depository Receipts (IDRs), Global Depository Receipts (GDRs) and American Depository Receipts (ADRs)?

Depository receipts (DRs) are financial instruments that symbolize shares of a local company howeverthey are listed and traded on a stock exchange outside the country of its origin/registration. DRs are issued in foreign currency.

To issue a DRs, a precise quantity of underlying equity shares of the company is lodged with a custodian bank, which authorizes the issue of depository receipts against these shares. Each DR symbolizes certain number of underlying shares of the issuer company. :

The different kinds of DRs:

American Depository Receipts (ADRs)

When DRs are issued only in U.S. and it has listed on a U.S. stock exchangesuch as the New York stock exchange, it is termed as American Depository Receipts (ADRs)

Global Depository Receipts (GDRs)

When DRs are issued in several countries together and listedon a stock exchange outside the U.S. say on London Stock Exchange, it is termed as Global Depository Receipts (GDRs)

Indian Depository Receipts (IDRs)

When DRs are issued in India and listed on an Indian StockExchange with foreign stocks as underlying shares, it is termed as Indian Depository Receipts (IDRs)

The shares of a company that form the basis of an ADR/GDR/IDR issue may be existing shares which shares that have already been issued by the company.

These shareholders now give their shares at a grant price for conversion into DRs.such a DR issue is termed as sponsored issue.

On the other hand, the company can issue fresh shares which form the underlying for the DR issue.

The company, whose shares were traded as DRs, gains a open investor base from the international markets.

Investors in international markets earn to invest in shares of the company that they may otherwise have been unqualified because of many restrictions or administrative issues.

Investors are able to invest in international stocks through domestic exchanges with their existing brokers and local currency.

Holding DRs give investors the right to dividends and capital appreciation from the underlying shares, but they do not get voting rights.

Conversely, issue of voting rights to DR holders is under consideration of SEBI at present.

The steps in issuing DRs are the following.

* The company has to observethe listing requirements of the stock exchange where they recommendgetting the DRs listed.

* The company appoints a depository bank which holds the stock and issue DRs against it.

* If it is a sponsored issue, the stocks from existing shareholders are acquired and delivered to the local custodian of the depository bank. Besides, the company issues fresh shares against which the DRs are issued.

* Each DR symbolizes certain number of underlying shares of the company.

DRs may trait two-way replaceable, subject to regulatory provisions of the countries concerned.

Which means that the shares could be buy in the local market andthen it is converted into DRs to be traded in the foreign market.

Likewise, DRs can be bought and converted into the underlying shares which are traded on the domestic stock exchange.

Indian companies are allowed to raise foreign currency resources in the form of issue of ordinary equity shares through depository receipts. Foreign companies were permitted to raise equity capital from India through IDRs.

SEBI has laid down the guiding principles that have to be followed by companies for IDRs.

These comprise the limit on the money raised by a company in India, one year lock-in on the conversion of IDRs into shares, the availability of IDRs to only resident Indian investors, etc.