Depositary Receipt (DR)

Depositary receipts allow you to invest in foreign companies through securities traded in a familiar market. A bank issues the receipt and holds the underlying foreign shares through a custodian.

• ADRs allow foreign company shares to trade in the US market, usually in US dollars.
• GDRs are commonly listed on international exchanges and may be issued in US dollars or euros.
• EDRs are depositary receipts listed and traded in European markets.
• DRs can make international investing more accessible and support portfolio diversification.

• Their value may still be affected by currency movements, liquidity, fees, and economic conditions in the foreign company’s home country.

  
  
  

A Depositary Receipt (DR) is a negotiable financial instrument issued by a depositary bank. It represents one or more shares, or a fraction of a share, in a foreign company.
DRs are traded on a stock exchange outside the company’s home country. This allows you to invest in a foreign company without directly purchasing its shares through an overseas stock exchange.
For example, suppose a company’s shares are listed only in another country. A depositary bank may issue DRs representing those shares and list them in your local market. You can then buy and sell the DRs in a similar way to ordinary shares.
Historically, DRs were issued as physical certificates. Today, they are generally held and traded electronically. American depositary receipts have been used to support international investing since the 1920s.
 

Depositary receipts allow you to purchase an instrument representing shares in a foreign company through a local or international stock exchange.
The actual shares are generally held by a custodian bank in the foreign company’s home country. A depositary bank then issues receipts representing those shares.
For example, instead of opening a foreign brokerage account and converting money into another currency, you may be able to purchase a DR listed on an exchange available through your existing broker.
DRs can help you add exposure to foreign companies and markets. However, they do not completely remove risks related to exchange rates, overseas regulations, liquidity, or economic conditions.
 

The main types of depositary receipts discussed here are American depositary receipts, global depositary receipts, and European depositary receipts.
Depositary receipt programmes may also be sponsored or unsponsored, depending on whether the foreign company formally participates in the arrangement.

1. American Depositary Receipts

American Depositary Receipts, or ADRs, represent shares in companies based outside the US. They are issued by US depositary banks and trade in the US market.
Each ADR may represent:

• One foreign share
• Several foreign shares
• A fraction of one foreign share

ADRs are generally priced and traded in US dollars. Dividends, when declared by the foreign company, are usually converted into US dollars before being paid to ADR holders.
The underlying foreign shares are held by a custodian in the company’s home market. This means you can gain exposure to the foreign company without directly buying its shares on an overseas exchange.
For example, suppose an Indian company’s shares are listed in India. A US depositary bank may issue ADRs representing those shares. US investors can then trade the ADRs through a US exchange or over-the-counter market, depending on the ADR programme.
The financial information available to investors depends on the type of ADR programme and the regulatory requirements that apply to it. Exchange-listed and sponsored ADR programmes generally have more detailed disclosure requirements than some unsponsored or over-the-counter programmes.

2. Global Depositary Receipts

Global Depositary Receipts, or GDRs, represent shares in a company and are issued for trading in international markets.
GDRs are commonly listed on exchanges outside the company’s home country, including European financial markets. They are often denominated in US dollars, although some may be denominated in euros or another permitted currency.
For example, suppose a company wants its shares to be accessible to investors in another international market. It may deposit shares with a custodian bank. A depositary bank can then issue GDRs representing those shares, subject to the regulations of the relevant countries and exchanges.
GDRs work in a similar way to ADRs. The main difference is that ADRs are designed for the US market, while GDRs may be offered across one or more international markets.

3. European Depositary Receipts

European Depositary Receipts, or EDRs, are depositary receipts issued for trading in European markets.
They represent shares in a company based outside the market where the receipts are traded. Depending on the arrangement, EDRs may be denominated in euros and traded like other listed securities.
For example, a non-European company may use an EDR programme to make its shares available to investors through a European exchange.
 

Read more: Dividend stocks 
 

A depositary receipt is created through an arrangement involving the company, a depositary bank, a custodian bank, brokers, and investors.

The general process works as follows:

1. Purchase the foreign shares: A broker purchases shares of the foreign company through its home-country market.
2. Transfer the shares to a custodian: The shares are delivered to a custodian bank in the company’s home country.
3. Hold the underlying shares: The custodian bank holds the shares on behalf of the depositary receipt programme.
4. Issue the depositary receipts: The depositary bank issues DRs representing the underlying shares.
5. List or trade the receipts: The DRs are made available for trading on the relevant stock exchange or over-the-counter market.
6. Deliver the DRs to investors: Investors can purchase the DRs through brokers, subject to applicable charges and market rules.

The number of shares represented by one DR is not always fixed. One DR may represent one share, several shares, or a fraction of a share, depending on the ratio set for the particular programme.

For example, one DR could represent two foreign shares. In another programme, two DRs might together represent one foreign share.

Depositary receipts can make it easier to invest in foreign companies, but they also involve certain costs and risks.

For example, a DR may trade in US dollars, but the underlying company may earn revenue and report results in another currency. A fall in that currency may affect the value of the DR even when its market price is shown in US dollars.

Similarly, a DR with low trading activity may be difficult to buy or sell quickly at the expected price.

The taxation of depositary receipts depends on the investor’s country of residence, the country of the foreign company, applicable tax treaties, and the type of income received.
For US taxpayers, dividends from ADRs are generally reported as taxable income. Foreign tax may be deducted before the dividend reaches the investor.
Eligible investors may be able to claim a foreign tax credit or another available form of tax relief, subject to US tax rules. This may help reduce the effect of the same income being taxed in both countries.
Capital gains may arise when you sell an ADR for more than its purchase price. The applicable tax treatment depends on your circumstances and the relevant tax laws.
For example, if a foreign company declares a dividend, tax may first be withheld in its home country. The remaining amount may then be converted into US dollars and paid to the ADR holder after applicable fees.
 

Depositary receipts, including ADRs, GDRs, and EDRs, provide a way to invest in foreign companies without directly trading through their home-country stock exchanges.
They can support portfolio diversification and make foreign securities more accessible. However, DRs may involve currency risk, liquidity concerns, administrative fees, foreign taxes, and economic risks linked to the company’s home country. You should understand the structure, share ratio, fees, tax treatment, and risks of a DR before making an investment decision.