What is a 'Depositary Receipt'

A depositary receipt is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. With a depositary receipt, a custodian bank in the foreign country holds the actual shares, often in the form of an American depositary receipt (ADR), which is listed and traded on exchanges based in the United States, or a global depositary receipt GDR, which is traded in established non-U.S. markets such as London and Singapore.

BREAKING DOWN 'Depositary Receipt'

When a foreign-listed company wants to create a depositary receipt abroad, it typically hires a financial advisor to help it navigate regulations, a domestic bank to act as custodian and a broker in the target country to list shares of the firm on an exchange, such as the New York Stock Exchange (NYSE), in the country where the firm is located.

ADRs typically trade on the American Stock Exchange (AMEX), the NYSE or the Nasdaq. ADRs provide investors with the benefits and rights of the underlying shares, which may include voting rights, and open up markets investors would not have access to otherwise. For example, ICICI Bank Ltd. is listed in India and is typically unavailable to foreign investors. However, the bank has an ADR issued by Deutsche Bank that is traded on the NYSE, which most U.S. investors can access.

Pros and Cons of Depositary Receipts

Depositary receipts let U.S. investors purchase shares in foreign companies in a more convenient and less expensive manner than purchasing stocks in foreign markets. Also, U.S. investors may use depositary receipts to diversify their portfolios on a worldwide scale.

However, many depositary receipts are not listed on a stock exchange and are illiquid or traded only by institutional investors. Also, the liquidity of trading unsponsored depositary receipts is low, and the securities are not backed by a company. Investors may lose their entire principal. The depositary receipt may be withdrawn at any time, and the waiting period for the shares being sold and the proceeds distributed to investors may be long. The bank may impose a substantial administration fee for each depositary receipt holder, reducing any potential gain from the receipt.

Example of Depositary Receipts

In July 2016, ALTX East Africa Ltd. introduced its high-tech exchange. The exchange has been worked on since 2013 as a method of delivering a global securities exchange facility based on top-notch technology, reducing settlement periods to under one day. The platform allows trading of assets in different classes and markets by professional investors, which reduces the risk management burden for brokers accessing the platform. ALTX launched with depositary receipts issued on the treasury secondary market, as well as global equities and access to global bonds and exchange-traded funds (ETFs).

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