Table of Contents
WHAT ARE DEPOSITORY RECEIPTS?
- A Depository Receipt (DR) is a negotiable financial instrument issued by a company in a foreign jurisdiction.
- They represent certain securities like bonds, shares etc.
- DRs is an important mechanism for raising funds by tapping foreign investors who otherwise may not be able to participate in the domestic market.
- In India, any company, whether private limited or public limited or listed or unlisted are capable of issuing DRs. The issue of DRs is regulated by Ministry of Finance’s “The Depository Receipts Scheme, 2014″.
- Depending upon the location in which DRs are issued, they are called as ADRs(American Depository Receipts), IDR (Indian Depository Receipts) or in general as GDR (Global Depository Receipt).
Types of DRs
General Classification:
- Sponsored:Under this type, there is a formal agreement between Indian issuer and foreign depository for creation or issue of DRs.
- Unsponsored:Under this type, there exists no formal agreement between the foreign depository and the Indian issuer.
Depending on whether a DR is traded in an organised market, the DRs can be classified as:
- Listed:They are traded on organised exchanges. For example, American Depository Receipts (ADRs) are traded on the New York Stock Exchange (NYSE).
- Unlisted:They are traded over the counter (OTC) between parties and are not traded on organised exchanges.
What is ADR?
- ADR stands for American Depository Receipts, which are a kind of negotiable security instrument that is issued by a US Bank representing a specific number of shares in a foreign company that trades in US financial markets.
- ADRs make it easy for US investors to purchase stock in foreign companies.
What is GDR?
- GDR stands for Global Depositary receipts. It is a type of bank certificate that acts as shares in foreign companies. It is a mechanism by which a company can raise equity from the international market.
- GDR is issued by a depository bank located overseas or in other words, GDR is issued by a depository bank which is located outside the domestic boundaries of the company to the residents of that country.
- GDR is mostly traded in the European Market. Issuing GDR is one of the best ways to raise equity from overseas.
WHAT IS Indian Depository Receipt (IDR)?
- An IDR is a financial instrument that allows a foreign company to raise funds in India.
- In an IDR, a foreign company issues shares to an Indian Depository, which then issues depository receipts (IDR) to Indian investors.
- An Overseas Custodian would hold the real shares underlying the IDRs and authorize the Indian Depository to issue the IDRs.
- IDRs are derivative instruments in this sense because their value is derived from the underlying shares.
- IDRs are denominated in Rupees.It reflects a stake in a certain number of the Issuing Company’s underlying equity shares. Deposited Shares are the name for these shares.
- Standard Chartered Bankwas the first foreign corporation to issue an IDR.
Characteristics
- Overseas Custodian:This is a foreign bank with branches in India that requires clearance from the Finance Ministry to function as a custodian, as well as registration with SEBI as an Indian depository.
- DR issue approvals:IDR issue approval will be required by SEBI, and an application can be submitted for this purpose 90 days prior to the issue opening date.
- Listing:These IDRs would be freely transferable and placed on Indian stock markets.
Laws That Govern Indian Depository Receipt
- The Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) were notified by the Central Government under section 605 A of the Companies Act.
- SEBI published rules for IDR disclosure as well as a sample listing agreement between the exchange and the foreign issuer that specifies continuous listing criteria.
- Intermediaries involved in Issuing IDR
Intermediaries involved in Issuing IDR
- An Overseas Custodian Bankis a banking organization based in a nation other than India with a presence in India that functions as a custodian for the equity shares of the issuing company against which IDRs are intended to be issued in the issuer’s underlying equity shares.
- Domestic Depository, which is a securities custodian registered with SEBI and authorized by the issuing company to issue Indian Depository Receipts; c) Merchant Banker, who is responsible for due diligence and through whom the issuer company files the draught prospectus for the issuance of the IDR with SEBI.
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