ADR / GDR

ADR and GDR are commonly used by the Indian companies to raise funds from the foreign
capital market. The principal difference between ADR and GDR is in the market; they are issued
and in the exchange, they are listed. While ADR is traded on US stock exchanges, GDR is
traded on European stock exchanges.

Depository Receipt is a mechanism through which a domestic company can raise finance from
the international equity market. In this system, the shares of the company domiciled in one
country are held by the depository i.e. Overseas Depository Bank, and issues claim against these
shares. Such claims are known as Depository Receipts that are denominated in the convertible
currency, mostly US$, but these can also be denominated in Euros. Now, these receipts are listed
on the stock exchanges.

Reason: Indian companies are prohibited from directly issuing rupee denominated securities
which can be listed abroad on foreign stock exchanges. Thus, the equity shares of an Indian
company cannot be directly listed on, say, the New York Stock Exchange. To overcome this
problem, Indian companies adopt the ADR/ GDR route.
Instrument: An ADR is quoted in US dollars and one ADR represents a certain number of
equity shares in the Indian company. The foreign investors can then directly buy and sell the
ADRs as if they were the shares of a foreign corporation. If the investor wants he can convert the
ADR into the equivalent number of underlying equity shares. The ADR would then be cancelled
as it would be converted into the equity shares.
Process : The broad commercial steps involved in an ADR issue (for the sake of simplicity we
shall only look at an ADR issue as the GDR issue is more or less similar) is as follows:
(a) The Indian company would issue rupee-denominated equity shares to a depository based in
America.
(b) A custodian in India would keep these shares in its custody.
(c) The depository would issue dollar-denominated receipts or shares to foreign investors, known
as ADRs/ ADSs. It would also set the ratio between the ADRs and the equity shares, i.e.,one
ADR is equal to how many equity shares. It could be one, more or less than one equity share. It
all depends upon the pricing of the share in the Indian market. The objective is to so price the
ADR that it does not become very expensive and out of reach for the retail foreign investors.
(d) A public issue would be made of the ADRs in USA and elsewhere. The investment bankers
would organise road shows and try and market the issue to institutional and retail foreign
investors. The book building method is used for the issue.
(e) The ADRs would be listed on a US stock exchange, e.g., Nasdaq or New Stock Exchange.
(f) Foreign exchange fluctuation risk or gain is to the account of the foreign investors.
(g) For the company there is no burden of repayment or interest.
(h) The company would pay dividend to the depository in rupee terms but the depository would
distribute this dividend to the ADR holders in dollars.
(i) For the investors their point of contact would be the depository.
(j) The Indian company would need to comply with the SEC requirements in terms of
compliance and accounting norms, such as US GAAP.
(k) The ADR holders may exercise their right to vote through the overseas

ADR and GDR are two depository receipt, that is traded in local stock exchange but represent a
security issued by a foreign public listed company.

Comparison Chart

BASIS FOR
ADR GDR
COMPARISON

Acronym American Depository Receipt Global Depository Receipt

Meaning ADR is a negotiable instrument GDR is a negotiable instrument

issued by a US bank, representing issued by the international
non-US company stock, trading in depository bank, representing
the US stock exchange. foreign company's stock trading
globally.

Relevance Foreign companies can trade in US Foreign companies can trade in any
stock market. country's stock market other than
the US stock market.

Issued in United States domestic capital European capital market.

market.

Listed in American Stock Exchange such as Non-US Stock Exchange such as

NYSE or NASDAQ London Stock Exchange or
Luxemberg Stock Exchange.

Negotiation In America only. All over the world.

Disclosure Onerous Less onerous

Requirement

Market Retail investor market Institutional market.

Definition of ADR
American Depository Receipt (ADR), is a negotiable certificate, issued by a US bank,
denominated in US$ representing securities of a foreign company trading in the United States
stock market. The receipts are a claim against the number of shares underlying. ADR’s are
offered for sale to American investors. By way of ADR, the US investors can invest in non-US
companies. The dividend is paid to the ADR holders, is in US dollars.

ADR’s are easily transferable, without any stamp duty. The transfer of ADR automatically
transfers the number of shares underlying.

Definition of GDR

GDR or Global Depository Receipt is a negotiable instrument used to tap the financial markets
of various countries with a single instrument. The receipts are issued by the depository bank, in
more than one country representing a fixed number of shares in a foreign company. The holders
of GDR can convert them into shares by surrendering the receipts to the bank.

Prior approval of Ministry of Finance and FIPB (Foreign Investment Promotion Board) is taken
by the company planning for the issue of GDR.

Key Differences Between ADR and GDR

The important difference between ADR and GDR are indicated in the following points:

1. ADR is an abbreviation for American Depository Receipt whereas GDR is an acronym for
Global Depository Receipt.
2. ADR is a depository receipt issued by a US depository bank, against a certain number of
shares of non-US company stock, trading in the US stock exchange. GDR is a negotiable
instrument issued by the international depository bank, representing foreign company’s
stock that is offered for sale in the international market.
3. With the help of ADR, foreign companies can trade in US stock market, through various
bank branches. On the other hand, GDR helps foreign companies to trade in any country’s
stock market other than the US stock market, through ODB’s branches.
4. ADR is issued in America while GDR is issued in Europe.
5. ADR is listed in American Stock Exchange i.e. New York Stock Exchange (NYSE) or
National Association of Securities Dealers Automated Quotations (NASDAQ).
Conversely, GDR is listed in non-US stock exchanges like London Stock Exchange or
Luxembourg Stock Exchange.
6. ADR can be negotiated in America only while GDR can be negotiated in all around the
world.
7. When it comes to disclosure requirements for ADR’s, stipulated by the Securities
Exchange Commissi Content: ADR Vs GDRon (SEC) are onerous. Unlike GDR’s whose
disclosure requirements are less onerous.
8. Talking about the market, ADR market is a retail investor market, where the investor’s
participation is large and provides a proper valuation of a company’s stock. As opposed to
the GDR, where the market is an institutional one, with less liquidity.
Procedure

Many publicly listed companies in India, trades their shares through Bombay Stock Exchange or
National Stock Exchange. Many companies want to trade their shares in overseas stock
exchange. Although, the companies need to comply with some policies. In such a situation
companies get itself listed through ADR or GDR. For this purpose, the company deposits its
shares to the Overseas Depository Bank (ODB) and the bank issues receipts in exchange for
shares. Now, every single receipt consists of a certain number of shares. These receipts are then
listed on the stock exchange and offered for sale to the foreign investors.

Depository Receipts help the Non-Resident Indian’s or foreign investors to invest in Indian
companies by using their regular equity trading account.

Conclusion

If a domestic company directly lists its shares on a stock exchange, then it must comply with the
stringent disclosure and reporting requirements and should pay the listing fees. Depository
receipt is an indirect route to enter and tap multiple markets or single foreign capital market. This
is a part of the management strategy of most of the companies to get listed overseas, to raise
funds, to establish the trading presence in foreign markets and to build brand equity.

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