Definition of 'Depositary Receipt'
A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. A depository receipt trades on a local stock exchange, but a custodian bank in the foreign country holds the actual shares. Depository receipts can be sponsored or unsponsored depending on whether the company that issued the shares enters into an agreement with the custodian bank that issues the depository receipt.
Investopedia explains 'Depositary Receipt'
Two common forms of depository receipts are the American Depository Receipt (ADR) and Global Depository Receipt (GDR). An ADR is listed and traded on exchanges based in the United States, while a GDR can be traded on established non-U.S. markets such as London and Singapore.
When a foreign listed company wants to create a depository receipt abroad, it follows a standard process. The firm will likely hire a financial advisor to help it navigate regulations, and will then choose a domestic custodian bank. A broker in the target country will purchase shares of the firm in the country where the firm is located, and then the domestic bank will register the shares on behalf of the broker. The bank then issues the depository receipt to the broker. The broker can have the shares listed on a local exchange, such as the NYSE, as an ADR.
For example, a firm based in Kenya looking to list shares in the United States through an ADR will pick a Kenyan bank to serve as a custodian of the firm’s shares. Once the bank is chosen, the firm will decide how many shares will be represented by the depository receipt, referred to as the depository receipt ratio, and will find an American broker willing to purchase the shares to be held by the custodian bank. Once the bank issues depository receipts, the American broker can sell those shares domestically.