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 access 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 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
The regulatory body for the capital markets of India, the Securities and Exchange Board of India (SEBI), issued new guidelines in 2019 for companies listing depository receipts. The guidelines allow for Indian companies to list depository receipts on a limited number of foreign exchanges, including the NASDAQ, the NYSE, and the London Stock Exchange.
This is a departure for regulators of the markets in India. While Indian companies were able to issue debt securities, called masala bonds, on international exchanges, the same option was 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 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.