Know more about Depositary Receipts!
Depositary receipts create a provision for shares of a public company to be traded on an exchange outside its domestic market.
What is a depositary receipt?
A depositary receipt (DR) is a security that represents economic interest or ownership in a foreign firm and trades like an ordinary share on a local exchange. Depositary receipts create a provision for shares of a public company to be traded on an exchange outside its domestic market.
How is a DR created?
A depositary receipt is created when the equity shares of a foreign company are deposited in a bank in the country on whose exchange the shares will trade. This bank is known as the depositary, which then goes on to issue receipts that represent the deposited shares.
What responsibilities does the depositary bank undertake?
Apart from issuing the receipts, the depository bank is also responsible for acting as custodian, transfer agent for the foreign company whose securities the DR represents and as a registrar, wherein, it looks after the dividend payments, stock splits and other taxable events.
How is the price of DR derived?
The price of each DR and the quantity of receipts issued is derived from a ratio. This ratio states the number of depositary receipts to the underlying shares. For example, one depositary receipt may represent one share of the underlying stock, many shares of the underlying stock, or a fractional share of the underlying stock.
How are DRs classified?
DRs can either be sponsored or unsponsored. When the foreign company whose shares are held by the depositary is directly involved in the issuance of the receipts, the DRs are known as sponsored DRs. Contrary to this, when the foreign company is not involved in the issuance of the receipts, the DRs are known as unsponsored DRs. Investors in sponsored DRs have the same rights as the direct owners of the common shares, whereas, in unsponsored DRs, the depository bank, not the investors in the DR, retains the voting rights.
What are the different types of DRs?
There are two types of depositary receipts-
- Global depositary receipts (GDRs)- These are issued outside of the company’s home country and outside of the United States.
- American depositary receipts (ADRs)- This is a US dollar-denominated security that trades like a common share on US exchanges.