Depository Receipts (DR) is a mechanism through which an Indian company (like MDH) can raise Finance from the International Equity Market. In this system, the share of a company from a domestic country (like India) are used to issue received in other countries. These instruments are called Depository Receipts (DR).
Each Depository Receipts consist received of a certain number of shares. For example -1 DR = 100 shares
Different Types of Depository Receipts
American Depository Receipts (ADR)
It is an instrument for an Indian company to raises funds in the USA. The Indian company will issue shares in India and is deposited with a Domestic Bank called Local Custodian Bank (LCB). Against these shares, the Overseas Bank in the USA called Overseas Depository Bank (ODB) will issue Depository Receipts (DR) for the investors in the USA. These DR’s in the USA are called American Depositary Receipts (ADR).
Indian American Depository Receipts (IDR) / Bharat Depository Receipts (ADR)
Using this a foreign company (E.g. US company – Tesla) would raise funds from India. The US Company will deposit its shares in a Bank in the US. Against these shares, an Indian Bank will issue IDR in India.
Global Depository Receipts (GDR)
GDR is used to tap the financial market of various countries. In this case, the DR’s are issued in more than one country. Special permission and approval are required from Finance ministry before the GDR’s are issued.
American Depository Receipts Advantages and Disadvantages
Advantages of Depository Receipts (DRs)
- Provides international companies an Additional source of capital
- Less international regulation
- Allow investors to diversify their portfolios to international securities
- Act as additional sources for companies to raise capital globally
- It provides investors the rights and benefits of the underlying shares.
- It is less expensive and more convenient than purchasing stocks in foreign markets.
Disadvantages of Depository Receipts (DRs)
- Greater risk due to foreign currency exchange rates volatility.
- There may be higher administrative fees, and taxes
- Very limited access for most of the investors
- Low liquidity
- Prevalence of currency risk for the underlying shares in another country.