What Is an International Depository Receipt (IDR)?
An international depository receipt (IDR) is a negotiable certificate that banks issue. It represents ownership in the stock of a foreign company that the bank holds in trust. International depository receipts are also known as American Depository Receipt (ADR) in the U.S. ADRs represent stocks of quality issuers in a number of developed and emerging markets. In Europe, IDRs are known as Global Depository Receipts, and trade on the London, Luxembourg, and Frankfurt exchanges. IDR can also specifically refer to Indian Depository Receipts (IDRs).
How an International Depository Receipt (IDR) Works
The biggest advantage of IDRs is that a foreign company does not have to comply with all the issuing requirements of the country where the securities will be traded, making it easier—and cheaper—for the company to trade in the overseas jurisdiction than if it were to seek a full-fledged listing.
IDRs generally represent fractional ownership of the underlying stock, with each IDR representing one, two, three or even 10 shares. The price of the IDR usually trades close to the value of the underlying shares on a currency-conversion basis, but occasional divergences may give rise to arbitrage opportunities.
Arbitrage is an investment opportunity for a simultaneous purchase and sale of an asset with the aim of profiting from an imbalance in the price. The trade exploits the price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies.
In August 2019, the Securities and Exchange Board of India (SEBI) endorsed allowing unlisted Indian companies to directly list their equities on overseas exchanges and simultaneously allow foreign companies to list their securities in Indian bourses. While Indian companies are able to issue debt securities (called masala bonds) on international exchanges, the same option is not available for equity shares.
The only option currently available to foreign firms looking to do this is via an IDR. Similar to an ADR, an IDR can be created when a broker purchasing shares of a foreign company, delivering them to a custodian in their home country and subsequently prompting a depository bank to issue certificates based on these shares.
The National Stock Exchange of India (NSE) was founded in 1992 and started trading in 1994, in contrast with the Bombay Stock Exchange (BSE), which has been in existence since 1875. Both exchanges follow the same trading mechanism, trading hours, and settlement process.