VIDEO
HIGHLIGHT
Log InSign up
Depository Receipts (ADR, GDR, IDR) - CA Final SFM (New Syllabus) Classes & Video Lectures
SummaryTranscriptChat

Depository Receipts (ADR, GDR, IDR) - CA Final SFM (New Syllabus) Classes & Video Lectures

Understanding Depository Receipts

Introduction to Depository Receipts

  • The video introduces the topic of depository receipts, specifically focusing on American Depository Receipts (ADRs), Global Depository Receipts (GDRs), and Indian Depository Receipts (IDRs).
  • The speaker emphasizes the need to conceptually understand what depository receipts are before diving into specifics.

What Are Depository Receipts?

  • Depository receipts serve as instruments in the international capital market, allowing companies to raise funds through equity issuance.
  • A brief overview indicates that while this definition captures the essence, it lacks clarity on how these receipts function in practice.

Mechanism of Fundraising via ADRs

  • An example is provided where an Indian company seeks to raise funds from foreign investors rather than issuing equity domestically.
  • It is explained that foreign investors cannot directly subscribe to shares in the Indian market; instead, they must use depository receipts as intermediaries.

Role of Intermediaries

Overseas Depository Bank

  • The first intermediary involved is identified as the overseas depository bank located in the U.S., which facilitates transactions between Indian companies and U.S. investors.
  • This bank issues ADRs based on shares received from the Indian company, acting as a custodian for those shares.

Domestic Custodian

  • Another intermediary mentioned is the domestic custodian located in India, appointed by the overseas depository bank.
  • The domestic custodian holds shares deposited by the Indian company and acknowledges receipt of these deposits to facilitate ADR issuance.

Issuance and Trading of ADRs

  • Once shares are held by custodians, ADRs can be issued by the overseas depository bank for purchase by U.S. investors.
  • Investors buy these marketable instruments using dollars, enabling them to trade ADRs among themselves without direct ownership of underlying shares.

Value Derivation of ADRs

  • It's crucial to note that each ADR represents a claim backed by actual shares issued by an Indian company.

Understanding American Depository Receipts (ADRs)

Overview of ADRs

  • ADRs can be traded directly among investors in the USA, with funds held by an overseas depository bank.
  • The objective is to transfer these funds to the Indian company after deducting charges and issue expenses related to ADRs.
  • All expenses are deducted from the dollar investment before transferring the remaining balance to the Indian company.
  • Ultimately, ADRs serve as certificates of deposits for shares held by overseas banks, fulfilling the goal of overseas fundraising.

Step-by-Step Procedure for Raising Funds via ADR

  • The process begins with an Indian company depositing securities with a custodian bank in India, which acknowledges this deposit to a US depository.
  • The US depository then issues ADRs to investors in the US, completing the cycle by passing US dollar receipts back to the issuing Indian company.

Features of American Depository Receipts

  • An ADR represents shares of a foreign company and is issued by a US bank known as a depository.
  • These receipts comply with regulations set forth by the Securities and Exchange Commission (SEC) in the USA.
  • Foreign shares are held overseas while certificates are traded on major US equity markets like NYSE or AMEX.
  • ADR transactions are denominated in US dollars, ensuring that funds received by share issuing companies are also in USD.

Key Characteristics and Rights Associated with ADR Holders

Rights and Advantages

  • ADR holders enjoy rights similar to those of shareholders owning shares directly in India.
  • Any corporate actions such as dividends or bonus issues from the Indian company will impact ADR holders directly.

Ownership Representation

  • Each ADR represents ownership in shares of an Indian company traded on US stock exchanges.
  • Dividends paid on ADR holdings are also denominated in USD, allowing them to be traded like any other US-based security.

Example Calculation: RIL's Fundraising through ADR

Financial Breakdown

  • For instance, if Reliance Industries Limited (RIL) aims to raise $100,000 through an ADR at an exchange rate of 1 USD = 70 INR:
  • One share priced at ₹1,400 equates to $20 when converted (₹1,400 / ₹70).

Issuance Details

  • If each ADR corresponds to five underlying shares:
  • The value per ADR would be $100 ($20 x 5).
  • To raise $100,000 at this rate would require issuing 1,000 ADROptions ($100,000 / $100).

Transitioning from ADR to Global Depository Receipts (GDR)

Understanding GDR

  • Following our discussion on ADRS, understanding GDRS should be straightforward since they share similarities but target different markets.

Key Differences Between GDR and ADR

  • GDR is essentially similar but aimed at investors outside the USA; for example targeting European markets instead.
  • In this case, both depository banks and investors would operate within London rather than U.S. stock markets.

Currency Denomination Variations

  • GDR can be denominated either in USD or Euros depending on market preferences.

Commonality between GDR &ADR

What are ADR, GDR, and IDR?

Differences Between ADR and GDR

  • The primary distinction between American Depository Receipts (ADR) and Global Depository Receipts (GDR) lies in the market of issuance and the exchange where they are listed.
  • It is crucial to note that these instruments are differentiated based on their respective markets and exchanges.
  • ADRs are traded on US stock exchanges, while GDRs are traded on European stock exchanges. Additionally, ADRs are issued by a US bank, whereas GDRs are issued by an international depository bank representing foreign companies.
  • Another significant difference is that ADRs facilitate fundraising specifically in the US stock market, while GDRs allow for fundraising in any country's stock market except for the United States.

Introduction to Indian Depository Receipts (IDR)

  • The discussion shifts to Indian Depository Receipts (IDR), which represent a reversal scenario where a foreign company seeks to raise funds in India rather than an Indian company raising funds overseas.
  • An Indian depository bank issues IDRs, with shares held by a custodian located in the issuing company's country.
  • In this arrangement, the issuing company provides shares that remain with the custodian within its own country.
  • The custodian acts as an agent for the Indian depository bank; upon acknowledgment from the custodian, IDRs will be issued accordingly.

Key Features of IDRs

  • IDRs will be denominated in Indian Rupees and traded within India's capital market as if they were regular shares.
  • This mechanism allows investors in India to invest directly into equity of foreign companies through IDRs.
  • Foreign companies issue shares to an Indian depository which then issues corresponding IDRs to investors in India.
  • The actual shares underlying each IDR are held by an overseas custodian who authorizes the issuance of IDRs by the domestic depository in India.

Conclusion

  • The session concludes with assurance that viewers have gained a clear understanding of depository receipts including ADR, GDR, and IDR concepts.
  • Viewers are encouraged to subscribe for more informative content related to financial instruments like depository receipts.
Video description

For more info visit our website: https://sfmguru.com/ For regular updates kindly subscribe to our channel: https://www.youtube.com/channel/UCiPzkqrzDsoq-pLrloT7Fcw Raising funds by an Indian Company through ADR: - Deposit of the securities of an Indian company with a custodian bank (agent of the depositary) in India. - The custodian bank makes acknowledgement of deposits to the depository in the US. - The depository in the US then issues the ADRs to the investors in the US. - The US$ receipts in the hands of the depository are passed on to the Indian Company issuing shares. American Depository Receipt (ADR): - A certificate (receipt) that represents shares of a foreign company, owned and issued by a U.S. Bank (Depositary). - Issued in accordance with the provisions stipulated by the Securities and Exchange Commission of USA. - The foreign shares are held in custody overseas, but the certificates traded on one of the three major U.S. equity markets (the NYSE, AMEX or NASDAQ). - ADRs are denominated in US$ and funds in the hands of the share issuing company are also in US$. Features of ADRs (In context of Indian Company) - ADRs are US$ denominated and are traded in the same way as are the securities of US companies. - The ADR holder is entitled to the same rights and advantages as owners of the shares in India. - ADR represents ownership in shares of Indian Company that is traded in US Stock Exchanges. - ADRs pay dividends in US$ and can be traded like shares of US based companies. - The value of ADR fluctuates based on the price movements of the underlying shares. ADR v/s GDR: - ADR and GDR are commonly used by the Indian companies to raise funds from the foreign capital market. - The principal difference between ADR and GDR is in the market in which they are issued and the exchange in which they are listed. - While ADR is traded on US stock exchanges, GDR is traded on European stock exchanges. - While ADR is issued by a US bank, GDR is issued by the international depository bank, representing foreign company's stock trading globally. - Through ADR issue, funds can be raised in US stock market, through GDR issue, funds can be raised in any country’s stock market except USA Title Music Composed and arranged by: Mr. Manish Thakkar Rights reserved with SFM Guru. #DepositoryReceipts , #Finance , #CAFinal , #FinancialLearning , #CAFinalSFM , #StrategicFinancialManagement , #SFM , #ADR, #GDR, #IDR