Two-way fungibility
The 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.
In plain language
A depositary receipt does not have to stay a depositary receipt forever. Some DR programmes let the underlying shares and the receipt convert into each other, in both directions.
That two-way conversion is what two-way fungibility means. Shares bought in the company's home market can become DRs for trading abroad. DRs bought abroad can become the underlying shares again, for trading at home.
How it works
The workbook states this feature applies only "subject to regulatory provisions of the countries involved" — it carries no fixed threshold, percentage or limit of its own. Whether conversion is allowed in either direction, and how much of it, depends entirely on the rules the home country and the DR's trading country have each set.
Because of that, two-way fungibility is a feature some DR programmes have and others do not, rather than a right attached automatically to every depositary receipt.
A worked example
Illustrative — the workbook gives no numeric example for two-way fungibility itself. An investor in Mumbai holding 1,000 shares of an Indian company running a two-way fungible ADR programme converts those shares into 1,000 ADRs, assuming a 1:1 ratio, to sell on a US exchange in dollars.
Later, a US investor who bought 500 of those ADRs converts them back into 500 underlying equity shares, credited to a demat account for trading on an Indian exchange in rupees. Neither conversion would be possible if the regulators in both countries did not permit it.
Why NISM asks about it
Chapter 2, section 2.2.7.3, introduces two-way fungibility directly after sponsored and unsponsored depositary receipts. Expect a question testing what the feature allows — conversion in both directions — and that it depends on regulatory permission in both countries, not on the DR itself.
Common exam traps
- Two-way fungibility is conditional, not automatic. The workbook ties it explicitly to the regulatory provisions of the countries involved — a DR programme can exist without this feature.
- Do not confuse it with the sponsored versus unsponsored distinction. One is about who can convert shares into DRs and back; the other is about who started the DR programme in the first place.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Sponsored depositary receiptA 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.
- 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.