Definition: Depository Receipt refers to a negotiable instrument, denominated in a foreign currency and is traded in the foreign stock exchanges, representing a fixed number of issuer company’s publicly traded domestic currency equity shares.
In finer terms, Depositary Receipt implies a negotiable certificate, which the Depository Bank issues to the foreign investors, indicating the shares in a foreign company. These DRs are traded on the local stock market, be it stock exchange or an over the counter market or among the Qualified Institutional Buyers (QIB). Hence, DR’s are negotiable securities in a foreign nation, which indicates publicly traded domestic equity of the company.
In a nutshell, DRs is a reflection of underlying shares. Further, these are administered through the global depository. Foreign investors holding depository receipts indicate that they hold shares in the equity of the foreign country.
These Depository Receipts are traded in the Stock Market of different countries, such as London, Luxembourg, Germany, Singapore and the United States.
Reasons for issuing Depository Receipt (DR)
Prior to the existence of Depository Receipts, if someone wants to invest their money in foreign securities, what they need to do is – to exchange their money into foreign currency and start a foreign brokerage account. Only then they can purchase the securities via a brokerage account, on a foreign exchange.
Hence, the evolution of DRs considerably reduced the complexities of investing in foreign securities. Also, investment in foreign equity has now become easy and convenient for investors.
Some of the most common reasons for the issue of depository receipts are given as under:
- Diversifying shareholder’s base into extended geographies.
- Setting up employee stock option plans.
- Increasing the global presence of the company.
- Improving the image and position of the company.
- Facilitating merger and acquisition activities.
Process of Issuing Depository Receipt
Depository Receipt Mechanism is an indirect one, as it does not directly invite the foreign investors to buy the shares and lists the shares on the stock exchange for the purpose of trading in the stock market. And the investors subscribe to it and they are allotted the DRs. So, it is an indirect issue of shares overseas using a substitute listing system.
- Issue of Equity Shares: Domestic Company issues equity shares to a Domestic Custodian, which are denominated in the national currency of the country.
- Updating the Depository Bank: Domestic Custodian keeps the equity shares denominated in local currency on deposit, in the company’s home country and updates/informs the Depository Bank to issue Depository Receipts on behalf of the issuing company.
- Issue of Depository Receipts to Investors: After the receipt of the instruction from the Custodian Bank, the Depository Bank issues the DR to the foreign investors. Basically, The depository bank is a large international bank that collects the dividends, reports, etc. and issues Depository Receipt against these shares. Further, the underlying shares are termed as the depository shares.
- Trading of Depository Receipts: In this way shares of a domestic company are traded in the foreign market in the form of Depository Receipts.
Types of Depository Receipt
- Global Depository Receipt (GDR): GDR is a basic term for depository receipts which represents the ownership of an underlying number of shares in a foreign company. These are traded in foreign stock exchanges like regular shares.
- American Depository Receipt (ADR): Those depository receipts which are listed in America based Stock Exchanges i.e. NEw York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ) and are traded only in the United States of America, are termed as American Depository Receipts.
- European Depositary Receipt (EDR): Depository Receipts issued by European banks are European Depository Receipt and are denominated in Euro. These DR’s are listed in the European Stock Exchange and thus traded only in Europe.
- Indian Depository Receipt (IDR): Indian Depository Receipt or IDR is the depository receipt issued by the Indian banks, denominated in Indian Rupees, indicating the ownership interest of the foreign investor in the specified number of shares in the issuing company. Such Depository Receipts are listed on Stock Exchanges based in India such as Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).
On the issuance and listing of these DRs they are traded by way of stock exchange like other regular securities. Hence, these receipts are traded only in India.
Depository Receipts come into being when the domestic currency shares of the company are issued to the depository’s local Custodian Bank, in relation to which the Depository Bank of the foreign country issues Receipts in the foreign currency such as US Dollar, Euro, Pound Sterling, etc., which can be traded openly in the foreign market, like other securities.
Depository Receipts facilitates the companies to use the international market to raise funds using equity shares,