Difference between ADR and GDR

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Table of Content


  • What is a Depository Receipt? 

  • What is ADR? 

  • What is GDR?

  • What is the difference between ADRs & GDRs? 

  • What are sponsored and non-sponsored ADRs?

  • How do ADRs work? with example

  • What are sponsored and non-sponsored ADRs?

  • What should investors do before investing in ADRs?

  • Advantages of ADRs

  • Disadvantages For ADRs

  • How do GDRs work? 

  • process how you can issue GDR in a company-

  • Advantages of GDR to Issuing Company

  • Disadvantages For ADRs

  • Conclusion 

What is a Depository Receipt?

When any foreign organization or any foreign investor invests in the domestic company that must be recorded in the local stock exchange of that specified country’s medium of exchange through domestic bank or depository, a receipt offered to that investor is known as Global Depository Receipt.

Now, let’s get into the types of Depository Receipts. In the financial world, there are two types of depository receipts you learn about in this blog.

Let’s get started with ADRs.

What is ADR? (American Depository Receipts)

ADR stands for American Depository Receipts. It is a kind of negotiable certificate that provides authority to U.S. investors. This certificate has granted the right to U.S. investors to invest in companies that have been tagged as non-U.S. companies.

It is parallel to a stock certificate demonstrating the number of shares of stocks. As the term used in the U.S. stock market, ADRs usually trade in U.S. dollars and the rest of the process is followed by U.S. settlement systems.

What is GDR? (Global Depository Receipt)

A negotiable financial instrument provided by a foreign bank that demonstrates shares of an foreign company listed on any of the stock exchanges other than the United States. When you invest as a domestic investor in any company that belongs outside of their home country, you as a GDR holder get dividends in foreign currency (Euro or GBP).

The prices of GDR are evaluated by the value of the related shares, however they don’t don’t need any source for the settlement, they are traded and settled separately of the underlying share. GDRs has the potential to enable organizations, the issuer, to invest in capital markets other than its home country. Usually, 1 GDR is equivalent to 10 underlying shares but any ratio can be determined.

What is the difference between ADRs & GDRs?

ADRs

GDRs

ADR stands for American Depository Receipts. It is a kind of negotiable certificate that provides authority to U.S. investors. This certificate has granted the right to U.S. investors to invest in companies that have been tagged as non-U.S. companies. 


GDR stands for Global Depository Receipt. It is a depository receipt provided by a foreign bank that demonstrates shares of an foreign company listed on any of the stock exchanges other than the United States. 

The US Stock market is a place where foreign companies can trade in multiple bank branches using the certificate of ADR. 

On the other hand, GDR allows foreign firms to trade in any stock market of distinctive countries other than the US market. 

It is issued only in America

It can be trade all over the world 

In this, market is more liquid 

Not as much liquid as compared to ADRs

High Investor’s participation

Low Investor’s participation

ADR market is for retail investor marketers 

GDR market is for institutional 

ADRs agreements are more burdensome

GDRs agreements are easy to manage.

What are sponsored and non-sponsored ADRs?

Sponsored ADRs means as the name suggests it is an agreement between a non-U.S. company and the U.S. depository bank that assists in recordkeeping, dividend payments, and much more services.

Unsponsored ADRs are those ADRs that are set up without the involvement and any association of a non-U.S. company. The process may commence with the help of a broker-dealer who wants to establish a U.S. trading market.

But don’t forget an ADR cannot be created if the non-U.S. company meets the reporting requirements under the Securities Exchange Act of 1934.

How do ADRs work?

A proper process has to be followed for creating an ADR. Initially, a broker has to buy a stock that must be INR-dominated and listed on a local stock exchange in the home country from which the company belongs.

For example-

Suppose, you want to invest your funds in France and for that, you need to open a brokerage account in Paris which helps you to convert your money from dollars to euros so that you are able to purchase French Stocks. But this process may sound tricky and lengthy. In Addition to this, taxes charged on your investment are totally up to the time how long you hold it and your income tax slab.

ADRs are a perfect cure for this hassle-like process. You don’t need to be stuck in the currency conversion process and bank opening formalities. By purchasing the ADRs of French companies, the banks and brokers assist in listing on the American exchanges.

Let’s discuss the process and how you can obtain it.

Investors who want to apply for ADRs can directly purchase from brokers and dealers. Now, you might be thinking about where brokers and dealers buy it. In the US financial markets, brokers/dealers already own the issued ADRs or alternatively they can create new ones for the investors. NASDAQ or NYSE is the prime source where brokers and dealers get the already-issued ADR.

Generating a new ADR means you have to follow the process for it. The process involves purchasing the foreign company stocks in the issuer’s home market and depositing the shares in a depository bank in the foreign market. Now, the bank is liable to issue ADRs that are equivalent to the value of the shares underlined with the bank, and the broker or dealer brings the ADR to US financial markets to trade them.

The process of generating an ADR relies on the costing, delivery, and demand.

ADR investors get US dollar dividends. Dividends are paid in the local currency through foreign banks, and US dollars are allocated by the dealer and broker after currency exchange costs and foreign taxes are considered.

Hence, this practice can be a sign of credibility of quality companies that fall under the developing countries. For ADR investors, it makes the process trouble-free for US investors to invest out of native countries. Foreign exchange is a light-bulb moment for the company’s financial health as well as for global financial markets.

What should investors do before investing in ADRs?

Financial education is the root of making the right investment decision. Before investing your hard-earned money, you should be adept at analyzing a company's political background, economic development, and social capital. So, you make your decision wisely instead of getting disappointed.

It is imperative to understand the terms and conditions of the U.S. company and non-U.S. company. A non-U.S. company follows a different procedure for disclosing financial and other information that are not similar to the U.S. companies. The disclosure requirements of non-U.S. companies are not so vast as compared to the U.S. companies but excluding annual reports named Form 20-F.

While you are investing in ADR, you should be aware of the fee or charges of the broker or the dealer. As per Securities Act Of 1933, you can review and verify the fees that are reported under the Form F-6 registration statement.

If you are looking for fees structure, you can find it in the registration statement section read as “Description of American Depositary shares”.

Advantages of ADRs

  • The company has numerous opportunity to expands its market and can make the maximum profit.
  • A company can find the strong investor network and greater financing that helps them to grow.
  • Investing in different countries can provide investors with savings in commissions.

Disadvantages For ADRs

  • There can be a menace to investors for exchange rate.
  • Investors have to face the higher commissions as per the depository banks of the United States that charge extra commission but it is not applicable on every trade.
  • Volatility may put you in a situation where you have to be cautious.

How do GDRs work?

GDRs main objective is to invest in foreign markets. Therefore, if a company plans to raise the revenue from the foreign markets, they require a GDRs, and for that, they need to appoint a foreign bank to work for them as an intermediary. So, they can issue the shares on its behalf without facing any troublesome situation.

Purchasing the equities on the domestic market from where the company belongs, generating GDR that demonstrates the shares, and then selling them on a foreign stock exchange all fall under the bank liability.

Here is the important note about voting rights. The voting rights are only assigned to the shares holded by the depository bank instead of investors who are GDR holders.

In contrast to ADRs, that shows potential for foreign company shares to be traded that are listed under the US stock exchanges, whereas GDRs allow trading in different countries. In addition, GDRs are offering trading on the International Order Book(IOB), in which investors have the privilege to get direct access to GRD from 30+ countries around the world.

Let’s understand with an example: consider an Indian Company that wants to invest in the French Stock Exchange. For that, they need to appoint a depositary bank of France to work for them as an intermediary. So, they can issue the shares as the residents of France from the domestic custodian of the company on its behalf without facing any troublesome situation.

Developing companies in developing countries mostly considered GDRs on foreign stock exchanges as a prime factor to augment the funds of the company for growth and development.

GDRs can bolster the investors who want to invest in foreign companies as investors can easily trade the shares using their domestic brokerage account instead of opting for a process in which you have to exchange currency and need to open a foreign account.

Let’s discuss the process how you can issue GDR in a company-

  1. Initially, you have to take approval for the issuance of GDRs from Board members of the company, regulatory authorities . and financial Institutions.
  2. After getting approval from the above concerned officials, intermediaries are appointed including High management, Co-manager, Legal Advisors, Overseas Depository Banks, and underwriters.
  3. Documents required such as trust deeds, subscription agreements, and depository agreements.
  4. Lastly, you need to complete the tasks such as timing, pricing and closing the issue.

Advantages of GDR to Issuing Company

  • Allows companies to invest in other countries' stock exchanges excluding the US
  • Get maximum retention and help to establish the visibility of the issuing firm
  • Opportunity to raise the funds of the issuing company due to foreign investors.

Disadvantages of Global Depository Receipts

  • Any unlawful activity can cause the serious repercussions to the company
  • In this kind of receipt, dividends paid in the forex market is subject to volatility as compared to the domestic country’s agency .
  • A GDR can be an exorbitant source of financing for any company.
  • It is beneficial and fruitful to the investors who have the potential to invest a high amount in GDR.

Conclusion:

Depository Receipts are the way to enter in any foreign markets and can invest in any country’s stock market. Any foreign individual or organization can invest in multiple markets to raise their capital and capture the maximum amount of presence from all over the world. GDR is the powerful receipt that allows companies to invest in other countries' stock exchanges excluding the US. It provides economic growth potential in emerging markets that will be advantageous for development of the dragging economies.