ADRs vs GDRs: Are these terms important for you?

If you are looking to invest in the stocks to meet your financial goals vis-à-vis your risk tolerance, there multiple ways to do so. Direct stock investments and indirect methods like mutual funds and Exchange-Traded Funds (ETFs) are some of the common ways. Another way, which may be less well-known but equally attractive, is American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).

If you are wondering what do these concepts entail, the difference between the two, and why you should know more about these terms, read on.

What are ADRs?

ADRs are certificates issued by a US bank, representing shares of a foreign company. They trade on US stock exchanges like NASDAQ and NYSE. ADRs are denominated in US dollars and follow US trading regulations.

They allow American investors to access foreign stocks in an easy, liquid, and safe manner while allowing foreign companies to raise capital in international markets.

For instance, Infosys has ADRs listed on the NASDAQ, allowing it to raise capital in the US. On the other hand, American investors can diversify their portfolio by including Infosys, a leading Indian tech company.

What are GDRs?

GDRs are similar to ADRs but are listed and traded on multiple international stock exchanges, such as the London Stock Exchange. Depending on the market in which they are listed, GDRs can be denominated in USD, EUR, or other currencies.

GDRs, unlike ADRs, allow a company to raise capital in two or more international markets. For instance, Tata Steel, Tata Power, and Larsen and Toubro (L&T) have GDRs listed on both the London Stock Exchange and the Luxembourg Stock Exchange.

Why ADRs and GDRs exist

Benefits for investors:

1. Easier access to foreign markets

Investing directly in foreign stocks often requires navigating complex processes like opening accounts in foreign countries, dealing with unfamiliar regulations, and managing foreign exchange conversions.

With ADRs and GDRs, investors like you can buy shares of foreign companies on local or familiar stock exchanges (e.g., NYSE for ADRs, London Stock Exchange for GDRs), simplifying the process.

2. Reduced currency and regulatory complexity

ADRs and GDRs are denominated in currencies like USD or EUR, removing the hassle of managing multiple currencies. They comply with the local regulatory framework of the listing exchange, sparing investors from understanding the issuing country’s market rules.

3. Portfolio diversification

ADRs and GDRs allow investors like you to gain exposure to global markets and diversify their portfolio across geographies, industries, and economies. This reduces dependence on the performance of a single country’s economy.

4. Liquidity and convenience

Since ADRs and GDRs are traded on well-known exchanges, they offer better liquidity than direct foreign investments in less accessible markets. They trade like regular stocks, making them easy to buy and sell through regular brokerage accounts.

Read More: 5 Things You Should Know About Depository Receipts

Benefits for companies:

1. Access to global capital Companies use ADRs and GDRs to raise funds in international markets without the need for a direct listing in those markets.

2. Expand investor base ADRs and GDRs enable companies to attract foreign investors who may be restricted from directly investing in foreign markets due to local regulations or logistical barriers.

3. Increased liquidity and visibility Listing shares through ADRs and GDRs increases a company’s visibility and improves liquidity in global markets.

How are Depositary Receipts Issued?

• You start with a broker. If you want to buy depositary receipts (DRs), you place the request through a broker linked to a local bank.
  
• The local bank checks the foreign stock first. That bank is called the depositary bank. It reviews the foreign company’s shares and decides whether to go ahead.
  
• Then the shares are bought. Either on the local exchange (if that is where it trades) or straight from the foreign stock exchange using another broker abroad.
  
• A custodian bank enters the picture. The depositary bank asks for the purchased shares to be delivered to a custodian bank in the foreign country. This bank holds the actual shares.
  
• Shares are bundled into lots. The custodian groups the shares into fixed packets (like 10 shares per packet, depending on the DR structure).
  
• DRs are issued against those packets. Each packet becomes a depositary receipt, and these DRs are sent back to the depositary bank.
  
• The DRs trade locally like a normal security. They get listed on the local stock exchange, so investors can buy/sell them without dealing with the foreign market directly.
  
• Finally, the investor gets the DRs. The depositary bank notifies the broker, the DRs are delivered to you, and the charges/fees are deducted from your account.
  

Can Indian Investors opt for ADRs and GDRs?

Indian investors can indeed invest in ADRs and GDRs from India. This opens the doors to attractive investment opportunities in leading global companies that are not listed on Indian stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Under the Reserve Bank of India (RBI)'s Liberalised Remittance Scheme (LRS), Indian residents can remit up to USD 250,000 per financial year for investments in ADRs, GDRs, and other foreign securities.

The easiest way for you to invest in ADRs and GDRs to diversify your portfolio is through an Indian brokerage platform that provides access to international securities including ADRs and GDRs. You can also gain exposure to these depositary receipts through international mutual funds and ETFs that invest in them.

What Indian Investors Should Consider

Here are some benefits of investing in ADRs and GDRs:

• Easy exposure to global companies and industries
  
• Portfolio diversification by investing in different markets
  
• Opportunity to benefit from the growth of global giants like Apple, Amazon, or Alibaba
  

Here are some risks to consider:

• Currency risk due to exchange rate fluctuations
  
• Tax implications both in India and the country of origin
  
• Regulatory differences between markets
  

To Sum Up

Understanding terms like ADRs and GDRs is essential if you want to build a diversified portfolio that goes beyond domestic stock investments. Both ADRs and GDRs allow you to access leading companies across the world in an easy, liquid, and regulated manner. As an Indian investor, both ADRs and GDRs can be a smart addition to your investment portfolio.