Sponsored depositary receipt
A depositary receipt that the issuing company itself creates by delivering its own shares to a depository, which lets it list on the exchange of the country where the receipt is issued.
In plain language
A depositary receipt lets a company's shares trade in a foreign market without the shares themselves ever leaving home. A bank abroad, called the depository, holds the real shares in custody and issues a certificate against them. That certificate is what actually trades.
Two different people can start this process: the company itself, or an investor who already owns the shares. When the company starts it, the receipt is called sponsored.
How it works
The workbook sets out the process in three steps. A company or an investor delivers a batch of equity shares to a depository, usually a foreign bank. The depository places those shares in a custodian account in the company's home country. It then issues a certificate — the depositary receipt — to investors in the overseas market.
Whoever completes step one decides the type. If the company delivers the shares and drives the process, the receipt is a sponsored depositary receipt, and it can be listed on the stock exchange of the country where it is issued — but only once the company applies for listing and meets that exchange's listing requirements.
India's own sponsored programme carries one hard figure. Indian Depository Receipts, issued in India by a foreign company, come with SEBI conditions including a one-year lock-in on converting the IDR into the underlying share, and IDRs are available only to resident Indian investors.
A worked example
Infosys is one of the Indian companies the workbook names as having issued depositary receipts abroad. Its ADR programme is sponsored, because Infosys itself, not an outside investor, delivered its shares to the depository bank and applied to list on a US exchange.
Illustrative, since the workbook gives no ratio for this step. Suppose Infosys delivers 10,00,000 equity shares to its depository bank at a 1:1 ratio. The bank issues 10,00,000 ADRs, each representing one Infosys share, for trading on a US exchange in dollars. Infosys chose to sponsor the programme itself specifically so the ADRs could be listed, rather than confined to an over-the-counter market.
Why NISM asks about it
Chapter 2, section 2.2.7.3 (Indian Depository Receipts, Global Depository Receipts and American Depository Receipts), sets out the three-step DR process and draws the sponsored/unsponsored line on who initiates it. Expect a question testing which party's action makes a DR sponsored, and the listing consequence that follows.
Common exam traps
- The type is decided by who delivers the shares, not by who buys the DR. A sponsored DR can still be bought by any investor abroad once it exists.
- Only a sponsored DR can be listed on a foreign exchange. An unsponsored depositary receipt trades over the counter only.
- Don't treat the IDR's one-year lock-in as a rule for every sponsored DR everywhere — the workbook attaches it specifically to SEBI's IDR guidelines, not to ADRs or GDRs generally.
Check yourself
1.Depository receipts where the shares are delivered by an investor rather than the issuing company are:
- a)Sponsored DRs, which may be listed on exchanges
- b)Unsponsored DRs, which typically trade only in OTC markets
- c)Global Depositary Receipts
- d)American Depositary Receipts
Show the answer
Answer: (b) Unsponsored DRs, which typically trade only in OTC markets
If the shares are delivered by an investor, then the DRs are referred as unsponsored depositary receipts. Typically, unsponsored DRs are not allowed to be traded in the stock exchanges. They can be traded only in OTC markets. They also have less regulatory requirement.
The contrast: if the issuing company is the one that delivers the securities and initiates the process, then the DRs are referred as sponsored depositary receipts and they can be listed in the exchanges of the country in which the DRs are issued. Companies that want their DRs to be listed should apply for listing and should comply with all the listing requirements.
So the test is simply who starts the process — the company or an investor.
Options C and D name geographic categories, not this distinction. ADRs are issued and traded in U.S.A by a non-US company — with Infosys, Wipro, ICICI Bank and HDFC Bank named as Indian examples. GDRs refer to depositary receipts that are allowed to be traded in more than one country, and are preferred to be issued in the European Union member states as commonality of the regulations makes it easy for the issuing companies to comply.
And a right DR holders do not get: holding DRs gives investors the right to dividends and capital appreciation from the underlying shares, but no voting rights.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Two-way fungibilityThe ability to convert a company's home-market shares into depositary receipts for trading abroad, and to convert those receipts back into the underlying shares, subject to both countries' rules.
- Unsponsored depositary receiptA depositary receipt an investor sets up by delivering their own shares to a depository, rather than the company — it cannot be listed on a stock exchange and trades only over the counter.
- Foreign Currency Convertible BondA bond issued by an Indian company to investors in foreign currency, paying interest and principal in that currency and convertible into ordinary shares at a price usually set above the market price.