Depositary such as political risk and economic risk, there

Topic: EconomicsEconomic Concepts
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Last updated: July 24, 2019

DepositaryReceipt advantages may include: Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars. Diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market.

Elimination of global custodian safekeeping charges, potentially saving Depositary Receipt investors up to 10 to 40 basis points annually. Familiar trade, clearance and settlement procedures. Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash distributions. Ability to acquire the underlying securities directly upon cancellation. 15.

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4 DISADVANTAGESOF GLOBAL DEPOSITORY RECEIPTSDespite thedisadvantages related to investing in foreign companies such as  political risk and economic risk, there arespecific disadvantages related to depository receipts that affect mainly investors. 1.      Dividend distribution. Dividends distributed  by foreign companies are not directlydistributed to the Domestic Receipts’ holders rather, a percentage is deductedas commission for the depository bank. That makes Depository Receipts have alower value relative to the original stock.2.

      Currency risk. Although DomesticReceipts are traded and quoted in terms of the domestic currency, dividends aredeclared in terms of the foreign currency which makes the return on theinvestment  volatile and therefore risky.3.      Double taxation. This risk occurswhen the home country of the issuing company and the home country of theDomestic Receipts’ holders do not have a treaty to eliminate  double taxation. Comparing theadvantages and the disadvantages of Depository Receipts, and  Especially.  Global Depository Receipts depends on theconditions of the offer made by the   issuing company because as we have indicatedit is so flexible and each case should  be  studied apart to evaluate itsattractiveness   CHAPTER-16 AMERICAN DEPOSITORY RECEIPTAn American depositary receipt (ADR) is a negotiable security that represents securities of anon-US company that trade in the US financial markets. Securities of a foreigncompany that are represented by an ADR are called American depositary shares (ADSs).

Shares of many non-US companies tradeon US stock exchanges through ADRs. ADRs are denominated and pay dividends inUS dollars and may be traded like regular shares of stock. Over-the-counterADRs may only trade in extended hours.The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges.The stock of many non-US companies trade on US exchangesthrough the use of ADRs.

ADRs enable US investors tobuy shares in foreign companies without undertaking cross-border transactions.The shares of the non-US corporation trade on a non-US exchange, while the ADRstrade on a US exchange. ADRs are one type of depositary receipt (DR), which is any negotiable securitiesthat represents securities of companies that is foreign to the market on whichthe DR trades. DRs enable domestic investors to buy securities of foreigncompanies without the accompanying risks or inconveniences of cross-border andcross-currency transactions.This is an excellent way to buy sharesin a foreign company while realizing any dividends and capital gains inU.

S. dollars. However, ADRs do not eliminate the currency and economicrisks for the underlying shares in another country. For example, dividendpayments in euros would be converted to U.S. dollars, net of conversionexpenses and foreign taxes and in accordance with the depositagreement. ADRs are listed on either the NYSE, AMEX or Nasdaq as well asOTC.

 ADR RATIO      Single      1 ADR = 1SHARE      ADR Ratio =1:1     • Multiple    1 ADR = 5 SHARES   ADR Ratio = 1:5    • Fraction    1 ADR = ½ SHARE    ADRRatio = 2:1    16.1PROCEDURE AND MECHANISM OF ISSUING ADR’SADR’Sare issued by a US bank, such as J.P. Morgan or the bank  of  NewYork, which functions as a depository, or stock transfer and issuing agent forthe ADR program. The foreign, or local shares, remain on deposit with thedepository’s custodian issuer’s home market.EachADR is backed by a specific number of an issuer’s local shares (e.g. one ADRrepresenting one share, one ADR representing ten shares, etc.

) This is the ADRratio, which is designed to set the price of each ADR in US dollars.•Financial information, including annualreports and proxies are delivered to US holders on a consistent basis by theDepositary. The dividends are converted into dollars and paid to ADR holders bythe Depositary. 16.2 How Does ADR Work? Let us take Infosys example – trades on theIndian stock at around Rs.2000/- •This is equivalent to US$ 40 – assume forsimplicity •Now a US bank purchases 10000 shares ofInfosys and issues them in US in the ratio of 10:1 •This means each ADR purchased is worth 10Infosys shares. •Quick calculation means 1 ADR = US $400 •Once ADR are priced and sold, its subsequent price isdetermined by supply and demand factors, like any ordinary shares.

 16.3 TYPESOF ADR’SWhen acompany establishes an ADR program, it must decide what exactly it wants out ofthe program, and how much time, effort, and other resources they are willing tocommit. For this reason, there are different types of programs, or facilities,that a company can choose. TYPES of ADR: Unsponsored ADR Sponsored ADR Level 1 Level 2 Level 3UnsponsoredADRsUnsponsoredshares trade on the over-the-counter (OTC) market. These shares are issuedin accordance with market demand, and the foreign company has no formalagreement with a depositary bank. Unsponsored ADRs are often issued by morethan one depositary bank.

Each depositary services only the ADRs it has issued.As aresult of an SEC rule change effective October 2008, hundreds of new ADRs havebeen issued, both sponsored and unsponsored. The majority of these wereunsponsored Level I ADRs, and now approximately half of all ADR programs inexistence are unsponsored.

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