American Depositary Receipt (ADR) is a type of security that allows investors to buy and sell shares of foreign companies on US stock exchanges. ADRs provide US investors with a convenient way to invest in foreign companies, without having to deal with the complexities of trading on foreign exchanges or converting currencies. This is what ADR means in the share market.
Understanding ADRs in equities and how they work is critical for investors wanting to diversify their portfolios. American Depositary Receipts (ADRs) enable US investors to acquire and sell shares in overseas corporations on US stock exchanges. ADRs are issued by US depository banks who hold the underlying foreign firm shares in custody.
The depository bank produces ADRs that reflect a specific number of foreign firm shares, which can be purchased and sold on US exchanges in the same way that normal stocks are.
The ADRs’ value is calculated using the value of the underlying shares in the foreign market, adjusted for currency exchange rates and other costs.
ADRs make it easier for US investors to invest in overseas companies since they may be traded in US dollars and do not require direct exposure to foreign markets or currencies.
Types of American Depositary Receipts
The two primary categories of American Depositary Receipts are:
1. Sponsored ADRs
In sponsored ADRs, a bank works on behalf of the foreign company to issue the ADR and manages transactions with investors. The foreign company maintains control over the ADR and typically covers the costs of issuance.
2. Unsponsored ADRs
Unsponsored ADRs are issued by a bank without direct involvement or permission from the foreign company. Different US banks may issue multiple unsponsored ADRs for the same foreign company, and these offerings may have varying dividends.
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ADR Levels
ADRs are classified into three categories based on their level of compliance with SEC laws, each allowing a varying level of flexibility and liquidity for investors. The levels are:
Level 1 ADRs
- Simplest and least expensive type.
- Foreign companies list their shares on US exchanges without SEC registration.
- Traded like regular stocks but not backed by foreign shares. No voting rights or conversion option.
Level 2 ADRs
- Require SEC registration, making them more costly and time-consuming.
- Backed by foreign shares, offering voting rights and conversion option.
- Can be used for secondary offerings to raise capital from US investors.
Level 3 ADRs
- Most expensive and complex type.
- Allow foreign companies to issue new shares and raise capital directly from US investors without SEC registration.
- Provide the highest flexibility and liquidity to investors, with free trading on US exchanges and conversion options.
Top 5 Indian ADRs By Market Cap
- HDFC Bank Limited (HDB)
Market capitalization: $140.35 billion
HDFC Bank Limited is the largest company in terms of market capitalization in India. - Dr. Reddy’s Laboratories Limited (RDY)
Market Capitalization: $11.09 billion - Infosys Limited (INFY)
Market Capitalization: $71.91 billion - ICICI Bank Limited
Market Capitalization: $80.33 billion - Wipro Limited (WIT)
Market Capitalization: $25.74 billion
ADR Fees
ADRs can have multiple associated costs. The following are a few of the possible fees.
- Depositary bank fees
- Brokerage fees
- Currency conversion fees
- Taxes
- Redemption fees
Investors should evaluate the costs against possible advantages of purchasing ADRs, since they may have an effect on the total return on investment.
Disclaimer: The above content is for informational purposes only. The 1% News recommends consulting a SEBI-registered investment advisor before making any investment decision.
