What is a Depositary Receipt?

What is a Depositary Receipt?

These are tradeable securities that represent a fraction of a share in a foreign company, and are denominated in the investor’s local currency.

What are the properties of a depositary receipt?

• Traded or listed in markets outside the home country of the company
• They confer equity ownership on holders, even though they are listed and traded separately.
• Do not have to be listed on a regulated exchange, they can trade OTC
• They are created and sometimes issued by depository banks.

What are the positives and negatives of issuing depositary receipts?

Benefits:

• Simple to issue
• Tool for international investors denominated in major, liquid currencies
• Offer companies better visibility with international investors
• Better liquidity
• Higher stock values

Negative:

They are exposed to some degree of currency risk, as dividends will be paid in the currency of the company’s primary equity listing.

What is the difference between unsponsored and sponsored ADRs?

Unsponsored ADRs are issued without the underlying company’s involvement. Whereas Sponsored ADRs are created at the behest of the companies themselves.

What are Level 1,2 and 3 ADRs?

1. Level 1 ADRs – These are OTC instruments created on behest of the underlying company
2. Level 2 ADRs – These are listed on a regulated US Stock Exchange
3. Level 3 ADRs – Foreign companies wishing to raise capital in the US market in the form of ADRs