International Depository Receipt (IDR): An Overview
An international depository receipt (IDR) is a negotiable certificate issued by a bank. It represents ownership of a number of shares of stock in a foreign company that the bank holds in trust.
International depository receipts are more often known in the U.S. as American depository receipts (ADRs). In Europe, they are known as Global Depository Receipts and trade on the London, Luxembourg, and Frankfurt exchanges.
The acronym IDR also is used to identify Indian Depository Receipts.
Understanding the IDR
IDRs are purchased by investors as an alternative to the direct purchase of foreign stocks on foreign exchanges. For example, American traders can buy shares of the Swiss bank Credit Suisse Group AG or Swedish automaker Volvo AB directly from American exchanges via ADRs.
- An IDR or ADR is a certificate of ownership of a number of shares in a company that trades on a foreign exchange.
- Investing in IDRs is an alternative to purchasing stock on a foreign exchange.
- For the companies, it enables greater accessibility to foreign investors.
For the companies, the IDR makes it easier and cheaper to reach international buyers. The company is not required to comply with all of the listing and regulatory requirements of every country in which it wishes to sell shares.
IDRs generally represent fractional ownership of the underlying stock, with each IDR representing one, two, three, or 10 shares. The price of the IDR usually trades close to the value of the underlying shares on a currency-conversion basis.
Occasional divergences in price are exploited for arbitrage opportunities. Arbitrage is the simultaneous purchase and sale of an asset with the aim of profiting from an imbalance in the price on various exchanges and in various currencies. The trade exploits the price differences of identical or near-identical financial instruments. Arbitrage can exist as a result of market inefficiencies.
Special Considerations on IDRs
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 value of an ADR should precisely match the value of the underlying stock. Tiny discrepancies in prices among exchanges are exploited by arbitrage traders.
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 by a broker purchasing shares of a foreign company, delivering the shares to a custodian in the 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.