An American Depositary Receipt

(ADR)

Serious Information

Trivia

An American Depositary Receipt is a share of stock of an investment in shares of a non-USA corporation. The shares of the non-USA corporation trade on a non-USA exchange, while the ADRs, perhaps somewhat obviously, trade on a USA exchange. This mechanism makes it straightforward for a USA investor to invest in a foreign issue.

Two banks are generally involved in maintaining an ADR on a US exchange: an investment bank and a depositary bank. The investment bank purchases the foreign shares and offers them for sale in the US. The depositary bank handles the issuance and cancellation of ADRs certificates backed by ordinary shares based on investor orders, as well as other services provided to an issuer of ADRS, but is not involved in selling the ADRs. ADR is a negotiable certificate evidencing ownership of shares in a foreign corporation from a country outside the market in which the DR is traded. Each DR denotes depositary shares (DSs) which represent a specific number of the underlying shares remaining on deposit in the issuer's home market. The term "DR" is commonly used to mean both the certificates and the securities themselves, and is the terminology used throughout this site.

Buying stock in a foreign company is another method to diversify your portfolio, some of the best growth opportunities may be in other nations, especially developing nations, such as China or India. However, investing directly in foreign companies is expensive, risky, and problematic because of the foreign language, and different foreign exchange and accounting rules. American Depositary Receipts simplifies investing in a foreign company.

First created in 1927 by JP Morgan, to make it easier for USA citizens to invest in British retailer Selfridge, American Depositary Receipts, also sometimes called American Depository Receipts, are certificates representing stocks of a foreign company, but listed on USA stock exchanges or over the counter, and all transactions are in USA dollars, and all communication in English.

One ADR certificate may represent 1 or more shares of a foreign stock, or if a stock is expensive, then ADR may represent fractions of a share, to give ADR an initial moderate price, or be in range of similar securities on the exchange where ADR will be listed. The ratio of company stock to ADR can range from 100,000:1 to 1:100.

Rule 144A Depositary Receipts are special ADRs only sold to Qualified Institutional Buyers as private placement and not subject to rules and regulations as ADRs. A Qualified Institutional Buyer is an institutional investor that can trade privately placed unregistered securities with other qualified institutional buyers. Consequently, these cannot be bought on public exchanges or over counter.

Depositary Receipts can, be created and sold in other nations, using a native language for communications and native currency for monetary exchanges, and thus, are sometimes called Global Depositary Receipts (GDR) or European Depositary Receipts (EDR) if such receipts are sold in Europe. Companies create and sell depositary receipts in several countries to broaden their base of investors, to increase awareness of company, to raise capital, and provide more liquidity.

How ADRs Work
The price of ADRs in a secondary market are, determined by supply and demand, but the price will not deviate much from prices of an underlying stock.

When dividends are paid, the custodian bank receives it and withholds any foreign taxes, exchanges it for USA dollars, then sends it to the depositary bank, which then sends it to the investors.

How ADRs are Created
ADRs may be sponsored or unsponsored (OTC); however, unsponsored ADRs are increasingly rare and cannot be listed on major stock exchanges because they are not registered with the SEC, and lack necessary qualifications. An unsponsored ADR is created by a USA investment bank or brokerage that buys shares in a nation where shares trade, deposits them in a local bank (custodian bank), which is often a branch of a U.S. bank, called the depositary bank. The depositary bank then issues shares representing an interest in stocks and handles most transactions with American investors, serving both as transfer agent and registrar for the ADR. The shares of foreign stock held in the custodian bank are called American Depositary Shares (ADS), although this term is sometimes used as a synonym for ADRs.

Most often, the company will sponsor the creation of its own ADR, in which case it is a sponsored ADR. There are 3 levels of sponsorship.

Level I
Level 1 depositary receipts are the lowest sponsored shares that can be issued. When a company issues sponsored shares, it has one designated depositary acting as transfer agent.

Level II (listed)
Level 2 depositary receipt programs are more complicated for foreign companies. When a foreign company wants to set up a Level 2 program, it must file a registration statement with SEC and is under SEC regulation.

Level III (offering)
A Level 3 depositary receipt program is the highest level a foreign company can have. Because of this distinction, the company is required to adhere to stricter rules similar to those followed by USA companies.

ADRs can be publicly offered or privately placed: the method of sale defines the segment of investor who can purchase the securities. In the US, publicly traded securities are sold to the broadest spectrum of investor and trade in either the over-the-counter (OTC) market or on a national stock exchange. Privately placed securities are typically sold to Qualified Institutional Buyers (QIBs), including institutions that own or invest at least $100 million in securities of non-affiliates and registered broker-dealers that own or invest on a discretionary basis $10 million in securities of non-affiliates

The accumulated evidence appears to suggest that Global Depositary Receipts from India between 1992 and 1998 issuance increases
stock prices permanently probably by reducing cost of capital and increasing liquidity.

Trivia

Animal-rights activists have targeted the world's largest overseer of assets, the Bank of New York, for its relationship with British animal-testing firm Huntingdon Life Sciences, according to the Financial Times newspaper. US citizens are able to invest in Huntingdon through American Depositary Receipts (ADRs), an investment vehicle held by US banks that represents shares in foreign companies.

In 2003 Shares in Rupert Murdoch's News Corp have fallen after it announced it had won control of satellite network DirecTV, securing its long-sought foothold in the US satellite TV market. News Corp American depositary receipts dropped $1.77 to $25.45.
In 2001 Asia Pulp & Paper (APP), one of the world's largest paper producers, has announced that it will stop repaying its debt, including interest payments. Headquartered in Singapore, APP is the 10th largest paper company in the world. It produces 5.7 million tonnes of paper and packaging a year. The company, which is listed on the New York Stock Exchange, has 17 manufacturing facilities in Indonesia, China and India. It may be difficult for creditors to seize assets because the company has so many operations in different countries. American depositary receipts for APP could be delisted by the NYSE because they have traded below $1 for more than 30 days.

In 2001 Gazprom's shares were currently only available to international investors in the form of American Depositary Receipts,

In 2004 India launched its biggest-ever share flotation, with the $1.2bn (£660m) debut of software firm Tata Consultancy Services

In 2002 Telephone giant China Telecom's massive flotation looks set to start next month, and could raise as much as $4bn for the company. The firm's application for a listing in the US with the Securities and Exchange Commission, filed , allots 159.6 million American Depositary Shares (ADSs) - each worth 10 shares in the company itself - to the US market.

Links on websites on subject

http://www.prism.gatech.edu/~rc166/Revised%20ADR%20paper.pdf : An Empirical Study of Exchange-Traded ADRs from India

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