Unsponsored depositary receipt
A 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.
In plain language
Not every depositary receipt is created by the company whose shares back it. Sometimes an investor who already owns the shares starts the process instead.
When that happens, the receipt is called unsponsored. The company itself takes no part in creating it, and — unlike a sponsored depositary receipt — it typically cannot be listed on a stock exchange.
How it works
The mechanism is the same three steps as any DR: shares go to a depository, the depository holds them in a custodian account, and it issues a certificate to overseas investors. What changes is step one — here an investor, not the company, delivers the shares.
That single difference carries two consequences. The workbook says unsponsored DRs are "typically not allowed to be traded in the stock exchanges" — they can only change hands over the counter instead. They also carry less regulatory requirement than a sponsored programme, precisely because the company never applied for a listing and never had to meet an exchange's conditions.
The workbook gives no percentage, fee or numeric threshold specific to unsponsored DRs. The whole distinction from a sponsored DR turns on who starts the process and where the resulting receipt can trade, not on any figure.
A worked example
Illustrative — the workbook does not walk through a full unsponsored-DR example. A US-based investor who already holds 5,000 shares of an Indian company delivers those shares to a foreign depository bank, which issues 5,000 unsponsored depositary receipts against them. The Indian company itself never applied to any exchange and carries no listing obligations.
Because the programme is unsponsored, those receipts can change hands only over the counter, between buyers and sellers who find each other directly. They cannot trade on a stock exchange floor the way a sponsored ADR could.
Why NISM asks about it
Chapter 2, section 2.2.7.3, sets out sponsored and unsponsored DRs together, right after the three-step DR process. Expect a question testing which party's action creates an unsponsored DR, and where it can, and cannot, trade as a result.
Common exam traps
- Unsponsored DRs are barred from exchange listing and trade OTC only — a common wrong answer assumes any DR can be listed once it exists.
- The type is set by who delivers the shares, not by who ends up holding the DR. Any investor can buy either type once it exists.
- Less regulation does not mean no regulation — the workbook says "less regulatory requirement," not none at all.
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
- 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.
- 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.