ADR – Understanding American Depository Receipt

ADR is an acronym for American Depository Receipt. It’s actually an instrument which is issued by US depository bank and traded at stock exchanges in the US.

Each American Depository Receipt or ADR represents certain fixed number of shares of a foreign company whose shares are listed and traded outside US.

By investing into American Depository Receipts, US’s domestic investors avoid the legal complications of the foreign county’s stock exchange where shares of the invested company are listed.

Companies with ADR generates fund from US market. These companies are also required to meet the stringent rules and regulations of US. This route has been adopted by many non-US companies whose stock is listed on a foreign exchange and wants to cross-list it in American stock exchanges.

At the end, when companies declare dividends to investors, ADR holder gets their portion of dividend based on the number of shares they hold through ADR.

American Depository Receipts was introduced to avoid difficulties in buying shares in foreign countries, trading in those shares at different prices, currency fluctuation and expensive commission.

Depository banks issue such ADRs and controls the number of shares that each ADR represents. To do that, these banks are purchasing a bulk lot of shares from the foreign company and then reissue them in different fixed lots representing one ADR through US stock exchanges or OTC market. A domestic US investor who wants to invest in these foreign company’s shares can do that by putting their money into these ADRs.

Types of American Depository Receipt or ADR

ADR – Understanding American Depository ReceiptWe have three different types of American Depository Receipts issued in US market;

  • Level 1 – These ADRs are traded over the counter (OTC) market and the company has limited reporting requirements compare to other types of ADRs. Companies who do not want their American Depository Receipts to be listed on an US exchange generally select this as a starter. Companies can upgrade it to Level 2 or Level 3 for better exposure.
  • Level 2 – Companies having these ADRs are to be listed in US stock exchanges and must meet the exchange’s listing requirements and other statutory requirements including SEC regulations.
  • Level 3 – This is the highest level which a foreign company can sponsor. Through this these foreign companies not only listed in stock exchange but also can issue shares to raise capital. At this level the foreign company has to adhere to rules and regulations that are applicable and followed by a domestic US company.

Tata Motors, Wipro, Infosys, Dr Redddys, ICICI Bank and HDFC are some of the Indian companies who have issued ADR. You can track these by using Google finance search engine.

If you want to search for Infosys ADR then type “INFY” or “Infosys”. It will take you to the options available with these words from where you can select “Infosys ADR” to track it.

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