What are Depository Receipts (DRs)
A depositary receipt (DR) is a transferable certificate issued by a bank which represents shares in a foreign company traded on a native stock exchange. It represents security, in the form of equity, issued by a foreign, publicly-listed company. The depositary receipts are physical certificates which permit investors to hold shares in the equity of foreign countries. The American depository receipt (ADR), is one of the most common types of DRs which has been offering companies, investors and traders global investment opportunities. It was established in 1920.
DRs have spread to other parts of the world in the form of global depository receipts (GDRs) since the establishment of American depository receipt. European DRs and International DRs are the most common Depository Receipts. American depository receipts are usually traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange.
ADRs are usually traded on a US national stock exchanges like the New York Stock Exchange or the American Stock Exchange. GDRs are commonly traded on European stock exchanges such as the London Stock Exchange. ADRs and GDRs are usually denominated in US dollars. But it can also be denominated in Euros.
Indian Depository Receipts (IDRs)
IDRs are negotiable securities to be listed on Indian stock exchanges. It is in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing foreign company. IDR is an instrument denominated in Indian Rupees created by a Domestic Depository to enable foreign companies to raise funds from the Indian Securities Markets.
How do DRs works
DRs are created when a foreign company wants to list its securities on the stock exchange of another country. First of all the listing company has to fulfil the criteria for DRs in the other country where they want to invest. Before creating DRs, the shares of the foreign company, which the DRs represent, are delivered and deposited with the custodian bank of the depository creating the DR. after the custodial bank receives the delivery of shares, the depository creates and issues the DR to investors in the country where the DRs are listed. These DRs are then listed and traded in the local stock exchanges of the other country.
Benefits of Depositary receipts
Depositary receipts permit investors to purchase equity in foreign companies. This helps the investors to diversify their portfolios. Depositary receipts are more convenient and less expensive than purchasing stocks in foreign markets.
