Global Depositary Receipts vs. American Depositary Receipts: An Overview
Investors and companies may wish to invest in publicly traded equity stocks that are not domiciled directly in their own country. These securities can add diversification to a portfolio and also provide a broader universe for identifying the highest potential return through stocks.
Domestic-domiciled securities are freely traded on their corresponding domestic exchanges daily through brokers and brokerage platforms. These domestic domiciled securities are issued and managed by the executive management of the domestic company. Depositary receipts, however, are shares of a foreign company offered in another foreign market. Depositary receipts can be structured in multiple ways and allow foreign investors to invest in foreign companies through their own domestic exchanges.
If a company wants to offer its equity shares in a foreign market it must work with a depositary bank. This means the underlying company seeking to raise money through the specially structured share issuance must partner with a depositary bank to do so. As an intermediary, the depositary bank manages the share issuance, administration aspects of the share listing, and other details involved with the shares being offered. The underlying company does not necessarily have direct access to manage their depositary receipt shares in the same way that they manage their domestic shares.
- Shares of foreign stocks offered in foreign markets are comprehensively known as depositary receipts.
- ADRs and GDRs are two types of depositary receipts with other types including European depositary receipts (EDRs), Luxembourg depositary receipts (LDRs), and Indian depository receipts (IDRs).
- ADRs are shares of a single foreign company issued in the U.S.
- GDRs are shares of a single foreign company issued in more than one country as part of a GDR program.
- Companies can issue depositary receipts in individual countries or they may choose to issue their shares in multiple foreign markets at once through a GDR.
Global Depositary Receipts (GDRs)
A global depositary receipt is one type of depositary receipt. Like its name, it can be offered in several foreign countries globally. Depositary receipts only offered in a single foreign market will typically be titled by that market’s name, such as American depositary receipts, discussed below, and EDRs, LDRs, or IDRs.
Global depositary receipts are typically part of a program that a company builds to issue its shares in foreign markets of more than one country. For example, a Chinese company could create a GDR program that issues its shares through a depositary bank intermediary into the London market and the United States market. Each issuance must comply with all relevant laws in both the home country and foreign markets individually.
American Depositary Receipts (ADRs)
American depositary receipts are shares issued in the U.S. from a foreign company through a depositary bank intermediary. ADRs are only available in the United States. In general, a foreign company will work with a U.S. depositary bank as the intermediary for issuing and managing the shares.
ADRs can be found on many exchanges in the U.S. including the New York Stock Exchange and Nasdaq as well as over-the-counter (OTC). Foreign companies and their depositary bank intermediaries must comply with all U.S. laws for issuing ADRs. This makes ADRs subject to U.S. securities laws as well as the rules of exchanges.
ADRs are alternative investments that include additional risks that should be thoroughly analyzed by American investors. Hypothetically, an investor could choose to broaden their investing universe by choosing to consider ADRs. ADRs ultimately increase the investment options for U.S. investors. They can also simplify international investing by providing the offering to U.S. investors through U.S. market exchanges.
For U.S. investors, ADRs can have some unique risks. Primarily the risk of currency found in conversion with the payment of dividends. Otherwise, ADRs are denominated in U.S. dollars but their initial offering value is based on a valuation that is created in terms of their home currency.
Special Considerations: Investing in Depositary Receipts
Depositary receipts, in general, can come with their own set of unique risks. It is important for investors in any type of depositary receipt to understand the prospectus document detailing the investment.
U.S. investors can potentially invest in either ADRs or GDRs. ADRs are only offered by a foreign company through a share offering in the United States. GDRs will usually be offered in multiple countries as part of a GDR program.
ADRs and GDRs give U.S. investors the opportunity to access foreign investment in their home market. While the issuing value of both ADRs and GDRs will be based on the underlying company’s valuation, the interest a company receives in foreign markets combined with its own domestic trading will have an influence on the open market trading price.