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Depositary Receipts (DRs) are US dollar denominated negotiable instruments issued by a depositary bank (e.g., Deutsche Bank), representing ownership of underlying ordinary shares of an issuer in a foreign jurisdiction, i.e. a jurisdiction other than where the DRs are traded. DRs can be issued in the form of American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs). GDRs and ADRs are issued pursuant to the same mechanism, except that ADRs are issued into the US markets, whereas GDRs are principally issued into non-US markets. DRs enable international investors to acquire and trade foreign securities without concern for the differing settlement timetables and other problems typically associated with investing directly in overseas markets.
DRs are typically issued, settled and cleared through the US or European settlement systems in US dollars. In the US, settlement takes place in the US clearing system The Depository Trust Company (DTC), and in Europe, through the clearing systems Euroclear and Clearstream.
Buying and selling DRs
If an investor wishes to purchase shares in a foreign company, the investor can either buy the foreign shares in the local market through a broker in that country or, providing the foreign company in question has a DR program, the investor can request his/her broker to buy DRs. The broker may either purchase existing DRs or, the broker may arrange for a depositary bank (e.g., Deutsche Bank) to issue new ones.
The process for issuing new DRs is simple. The investor's broker contacts a broker in the issuing company's home market and acquires shares in that company. These shares are then deposited with the depositary bank's local custodian. Upon confirmation that the custodian has received the shares, the depositary issues the corresponding number of DRs to the investor via the broker.
In some exceptional cases there may be restrictions on the issuance of new DRs under existing programs because of local regulations.
DR holders seeking to sell their investment have two options. They can sell their DRs, in which case they trade and settle like other US or European securities as the case may be. Or they can cancel their DRs. In this case the broker acting on behalf of the owner of the DRs will request the depositary bank to cancel the DRs and release the underlying shares to a domestic broker in the issuing company's home market. The domestic broker will then sell the shares locally and the proceeds will be remitted to the investor.
DR holders are entitled to all the dividends payable on the underlying foreign shares and, furthermore, to have these paid in the currency in which the DRs are denominated - usually US dollars.
Shareholder information such as annual reports, notices of general meetings and corporate actions, and official news releases are provided by the issuer to the depositary who will in turn make such materials available to the receipt holders.
The investor is thus spared some of the costs and difficulties often encountered when investing directly in local markets, including currency, settlement, and language problems.
Why do investors buy DRs?
Some of the advantages of DRs for international investors include the following:
They offer investors a convenient means of holding foreign shares.
They simplify the trading and settlement of foreign equities. DRs trade and settle just like US or European securities, i.e. in US dollars with settlement in the US (DTC) or European clearing systems (Euroclear/Clearstream).
They may offer lower trading and custody costs when compared with shares bought directly in the foreign market.
DR holders can vote if the issuer wishes them to and the depositary bank may facilitate that process.
Many US bank and pension fund portfolios may be prohibited by their charters from purchasing foreign securities. ADRs, however, may be recognised as US securities.
ADRs, and normally GDRs too, are denominated in US dollars. Dividend payments on the underlying shares are converted into US dollars by the depositary bank. These features minimise foreign exchange problems for international and US investors.
Why do companies launch DR programs?
ADRs
ADR programs are becoming ever more attractive to non-US corporations, as an effective means of accessing the important US market. ADRs have also taken on increasing importance in cross border merger and acquisition activity.
Some of the advantages to a non-US corporation of initiating an ADR program include the following:
An ADR program provides a simple means of diversifying a company's shareholder base and accessing the US market.
It may increase the liquidity of the underlying shares of the issuer.
ADRs can be used as an equity financing tool in both M&A transactions and ESOPs (Employee Stock Ownership Plans) for US employees.
An ADR program helps to increase a non-US company's visibility and name recognition in the US investor community.
A company may raise capital in the US market through some types of ADR programs.
GDRs
The advantages of a GDR program are broadly similar to those of an ADR program, except that they may give access to pools of international capital outside of the United States.
Some of the advantages to a non-US corporation of initiating a GDR program include the following:
A GDR program provides a simple means of diversifying the company's shareholder base and of tapping the global capital markets.
It allows capital raising on a scale which might prove difficult in the local market.
It increases the issuer's visibility and name recognition in the international markets, which may ease the path of future capital raising exercises.
A useful structuring tool
While DRs are generally used to make equity more widely available or to raise capital outside the issuer's domestic market, they can also be used as part of many other financing structures. The concept of a receipt trading in one market, which represents an instrument held in custody in a different market, can be adapted to a wide variety of transactions.