Depository Receipts – the pathway to overseas investments

We know that a company can list itself on all the domestic stock exchanges after an IPO subject to certain conditions and investors and traders can start investing and trading in the shares of that company. But what if a company wants to list itself on a foreign stock exchange to generate investment and engage in overseas trading of its equities or if a foreign company wants to list on Indian stock exchanges for trading and investing in India.

Depository Receipts or DRs as they are commonly called come handy in that case. They are financial instruments representing the shares or equities of a foreign company that are trading on the local stock exchange. Depository Receipts are usually issued foreign currencies, mostly in USD ($).

To issue Depository Receipts the shares of the foreign company are lodged with a local bank known as custodian, which subsequently authorize the issue of Depository Receipts against the underlying shares. There are certain conditions with Depository receipts based on country and type of the issue, based on these conditions the DRs can be converted to equivalent equities or shares. Based on the place of issue, the DRs can be of three types.

1) American Depository Receipts (ADR): - If the Depository Receipts are issued and listed on the NYSE (New York Stock Exchange) or any other stock exchange based in USA they are American Depository Receipts or ADR.

2) Global Depository Receipts (GDR): - If the Depository Receipts are listed on stock exchange outside the United States, they are Global Depository Receipts (GDR).

3) Indian Depository receipts (IDR): - If a foreign company wants to list on NSE, BSE or any other Indian Stock Exchange, it needs to obtain Indian Depository Receipts (IDR) for its underlying shares or equities.

The depository receipts are usually based on pre-existing shares of the company i.e. the shares which have already been issued. The share holders holding the shares offer the share at an agreed price for converting them into Depository Receipts. Since the shares in this case are being sponsored this type of Depository Receipts will be known as a sponsored Issue.

The company can inversely also issue fresh shares as underlying shares to obtain Depository Receipts. The funds which are raised overseas by selling shares need to be remitted back to the home country within a pre specified period, depending on the applicable regulations of the stock exchange.

The benefit of Depository Receipts for the companies is that they get a wider investor base from the international markets which otherwise would have been difficult. It helps them to raise funds from the overseas market.

Depository receipts provide investors the benefits of investing in foreign companies or international stock which after DR are trading on the domestic exchanges. If an investor is holding a DR of a particular company, he too gets the right to dividend and capital appreciation from the underlying shares similar to the stockholders but holding a DR does not give the right to vote in the company.

To issue Depository Receipts, the company needs to comply with the eligibility requirements for listing of the stock exchange where they want to get listed. After fulfilling the eligibility criteria, a depository bank is appointed which issues the DR against underlying shares or equities. In case of a sponsored issue, the stocks are acquired from the existing stockholders and sent to the depository bank’s custodian or the company can simply issue fresh shares for getting the DRs issues. There can be a single DR for certain number of underlying shares.

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After the confirmation from the custodian’s end, that the shares are received by them, the depository bank will issue subsequent Depository Receipts to the brokers to trade in the selected foreign stock exchange on which the DRs are listed.

The process of issuing Depository Receipts is under SEBI’s (Securities and Exchange Board of India) governance. SEBI has laid down certain rules and regulations which needs to be followed and fulfilled before issuing and IDR. In case of any issue the traders and investors can anytime approach SCORES (SEBI’s complaint and redressal system) and lodge a complaint.

The DRs are traded as normal shares only in the foreign exchanges but the volatility is subject to the volume of traders and local conditions at the home country of the issuing company. You can trade in the domestic equities first if you are a beginner to the stock market and then subsequently expand your portfolio to DR.

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