ADR, GDR and IDR

A pension fund in Boston wants to own an Indian software company. Opening an Indian demat account, getting a PAN, clearing FPI registration and settling in rupees is a great deal of friction for one holding.

A depository receipt removes all of it. The Indian shares are locked away with a custodian bank in India; against them, a depository bank abroad issues certificates that trade in dollars on a New York exchange, settle the American way, and pay dividends in dollars. The Boston fund buys those. Economically it owns the Indian shares. Legally it owns a receipt.

The difference between the three names is only where the receipt is listed, never who issued it.

• ADR — the DR is listed on a stock exchange in the USA, such as the New York Stock Exchange or NASDAQ.
• GDR — the DR is listed on a stock exchange outside the US.
• IDR — the mirror image: DRs issued in India and listed on Indian exchanges, with foreign company stocks as the underlying shares.

The issue process runs: the company complies with the listing requirements of the chosen exchange and its regulator; it appoints a depository bank to hold the stock and issue receipts against it; in a sponsored issue the shares are acquired from existing shareholders and delivered to the depository bank's local custodian, otherwise the company issues fresh shares; each DR is defined as representing a set number of underlying shares. Once the custodian confirms receipt of the shares, the depository bank issues the DRs to brokers to trade.

DRs are issued in foreign currency, usually US dollars. Holding them gives the investor the right to dividends and capital appreciation from the underlying shares — but not voting rights.

An Indian IT services company has an ADR programme in which 1 ADR = 2 equity shares.

Assume the share trades at Rs 1,650 on the NSE and the rupee is at Rs 88 to the dollar.

Underlying value per ADR = 2 × Rs 1,650      = Rs 3,300
Fair value of one ADR    = Rs 3,300 ÷ 88     = USD 37.50

A US fund holding 4,000 ADRs is economically holding 8,000 Indian shares worth Rs 1.32 crore.

The company declares a dividend of Rs 18 per share. The registrar computes 8,000 × Rs 18 = Rs 1,44,000 against the custodian's folio — the custodian, not the US fund, is the holder on the Indian books. The depository bank converts and distributes the dollars onward, net of its fee.

And when a resolution is put to vote at the AGM, those 8,000 shares carry votes the US fund cannot cast. The right sits with the custodian arrangement; the ADR holder has none.

Chapter 4.3 (Depository Receipts). Two of the chapter's five sample questions come straight from it: who holds the stocks underlying a DR issue (the depository bank / local custodian) and which right DR holders do not have (voting). Expect also a direct ADR-versus-GDR-versus-IDR identification question.

• A DR is not a share. Dividends and capital appreciation yes; voting rights no. This is the most examined single fact in the section.
• ADR versus GDR is decided by where it is listed, not who issued it. An Indian company listing receipts in London has issued GDRs, not ADRs.
• An IDR reverses the direction — a foreign company's shares underlying receipts listed in India. Candidates routinely read it as "Indian company's DR abroad".
• Sponsored issue ≠ fresh issue. In a sponsored DR issue the shares come from existing shareholders; otherwise the company issues new shares, which changes its share capital.
• An FCCB is not a DR. It is a foreign-currency bond convertible into shares — issued under the 1993 scheme that also governs the DR mechanism, which is why the two get conflated.
• Whether DRs can be converted back into the underlying equity shares depends on the country and the conditions of issue — it is not automatic.