American Depository Receipt is an easier way for US investors to buy into foreign companies.
Non-US firms also benefit from ADRs as it makes it easier to attract American investors. Here is all you need to know about the offering
1. What are ADRs?
An ADR is an instrument that allows US investors to buy shares of overseas companies.
Issued by US banks, ADRs represent a fixed number of shares of the foreign company , which is tapping the US market to raise funds. Many US investors prefer ADRs because they are priced in dollars and are traded like any other shares.
2. How is this instrument relevant to India?
There are 12 Indian compa nies which have their ADRs listed in the US. These are Dr. Reddy's Laboratories, HDFC Bank, ICICI Bank, Infosys, MakeMyTrip, Rediff.com, Sify Technologies, Tata Motors, Vedanta, Videocon d2h, Wipro, WNS Holdings
3. What are the advantages of ADRs?
Investors can be comforted about the governance of the company in which they are investing since the depository bank will not issue the receipts un til it has verified the controls and policies. It saves investors the trouble of understanding and studying the Indian markets. Also, they don't need to worry about foreign currency transactions.
4. How does the ADR work?
If an Indian company wants to is sue ADRs, it will deliver the corre sponding number of shares to the US depository bank. The depository bank will issue receipts against these shares and these receipts are traded on the stock exchanges in United States. Investors can buy these receipts if they are interested in betting on the company . Further, the holder of the receipt can also get the depository to convert the ADR into underlying shares and offload them in the Indian market.
5. What are the types of ADR?
There two types of ADRs un sponsored and sponsored ADRs.
A sponsored ADR is completely backed by the company . However, with an unsponsored ADR, it is not backed by the issuing company but run by global custodians of shares.
6. What decides the pricing of ADR?
To understand if the receipt has been priced at fair market value, the following ratio is used ORD:ADR, where ORD refers to the Ordinary Share Value. For instance if HDFC Bank's ratio is 3:1, it implies that 3 shares of HDFC equal to a single ADR. And if an investor wants to pick up ADRs of HDFC Bank, she must verify if the ADRs are priced fairly by taking into consideration the current exchange rate.
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