tejas.gaikwad.1044
Tejas Gaikwad
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.
This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq as well as OTC.
Each ADR is issued by a domestic custodian bank when the underlying shares are deposited in a foreign depositary bank, usually by a broker who has purchased the shares in the open market local to the foreign company. An ADR can represent a fraction of a share, a single share, or multiple shares of a foreign security. The holder of a DR has the right to obtain the underlying foreign security that the DR represents, but investors usually find it more convenient to own the DR. The price of a DR generally tracks the price of the foreign security in its home market, adjusted for the ratio of DRs to foreign company shares. In the case of companies domiciled in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depositary banks have various responsibilities to DR holders and to the issuing foreign company the DR represents.
Sourcing ADRs:-
One can either source new ADRs by depositing the corresponding domestic shares of the company with the depositary bank that administers the ADR program or, instead, one can obtain existing ADRs in the secondary market. The latter can be achieved either by purchasing the ADRs on a US stock exchange or via purchasing the underlying domestic shares of the company on their primary exchange and then swapping them for ADRs; these swaps are called crossbook swaps and on many occasions account for the bulk of ADR secondary trading. This is especially true in the case of trading in ADRs of UK companies where creation of new ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government; sourcing existing ADRs in the secondary market (either via crossbook swaps or on exchange) instead is not subject to SDRT.
ADR termination:-
Most ADR programs are subject to possible termination. Termination of the ADR agreement will result in cancellation of all the depositary receipts, and a subsequent delisting from all exchanges where they trade. The termination can be at the discretion of the foreign issuer or the depositary bank, but is typically at the request of the issuer. There may be a number of reasons why ADRs terminate, but in most cases the foreign issuer is undergoing some type of reorganization or merger.
Owners of ADRs are typically notified in writing at least thirty days prior to a termination. Once notified, an owner can surrender their ADRs and take delivery of the foreign securities represented by the Receipt, or do nothing. If an ADR holder elects to take possession of the underlying foreign shares, there is no guarantee the shares will trade on any US exchange. The holder of the foreign shares would have to find a broker who has trading authority in the foreign market where those shares trade. If the owner continues to hold the ADR past the effective date of termination, the depositary bank will continue to hold the foreign deposited securities and collect dividends, but will cease distributions to ADR owners.
Usually up to one year after the effective date of the termination, the depositary bank will liquidate and allocate the proceeds to those respective clients. Many US brokerages can continue to hold foreign stock, but may lack the ability to trade it overseas.
Advantages of investing in ADRs:-
While investors in ordinary shares must often rely on local brokers based in the home exchange of the company to buy or sell shares of ordinary stock, ADRs can be bought and sold easily in the US. In addition, ADRs are denominated in dollars and also pay dividends in dollars, which eliminates (often costly) currency conversions. Another important advantage is that foreign companies which issue ADRs must comply with US securities laws and disclosures, which often provide more information and greater transparency for the investor (please note that issuers of Level One ADRs are not required to comply with SEC regulations). Lastly, there is evidence that the issuance of an ADR can potentially improve the liquidity of the stock in the home market.
Disadvantages of investing in ADRs:-
One of the main disadvantages of trading ADRs is that certain ADRs are not nearly as liquid as their ordinary shares, making it difficult to establish or sell a large position in a given ADR. In addition, while ADRs are dollar-denominated, they still expose investors to currency risk. Japanese ADRs, for instance, are made less valuable by a decline in the yen. Finally, ADRs sometimes trade at a premium to the ordinary share, so that investors must pay extra for the convenience of the ADR.
In terms of understanding the investor base of ADR holders, ADRs settle within DTC similar to regular stocks. Consequently, trading of ADRs can be tracked using similar methods to equity surveillance.
A frequent misconception in the marketplace is that there is a difference between ADRs and GDRs. There is absolutely no difference between an American Depositary Receipt and a Global Depositary Receipt. They work exactly the same way. What will happen is with a Level III ADR or with a private placement under Rule 144A of the Securities Act of 1933 (“Rule 144A” or “144A”), the underwriter will determine what to call the depositary receipt. If a big portion of the offering is taking place in Europe, the underwriter will call the depositary receipt a GDR, trying to get away from tainting the security by calling it an “American Security.” If the majority of the offering takes place in the United States, then the underwriter will call it an ADR.
This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq as well as OTC.
Each ADR is issued by a domestic custodian bank when the underlying shares are deposited in a foreign depositary bank, usually by a broker who has purchased the shares in the open market local to the foreign company. An ADR can represent a fraction of a share, a single share, or multiple shares of a foreign security. The holder of a DR has the right to obtain the underlying foreign security that the DR represents, but investors usually find it more convenient to own the DR. The price of a DR generally tracks the price of the foreign security in its home market, adjusted for the ratio of DRs to foreign company shares. In the case of companies domiciled in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depositary banks have various responsibilities to DR holders and to the issuing foreign company the DR represents.
Sourcing ADRs:-
One can either source new ADRs by depositing the corresponding domestic shares of the company with the depositary bank that administers the ADR program or, instead, one can obtain existing ADRs in the secondary market. The latter can be achieved either by purchasing the ADRs on a US stock exchange or via purchasing the underlying domestic shares of the company on their primary exchange and then swapping them for ADRs; these swaps are called crossbook swaps and on many occasions account for the bulk of ADR secondary trading. This is especially true in the case of trading in ADRs of UK companies where creation of new ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government; sourcing existing ADRs in the secondary market (either via crossbook swaps or on exchange) instead is not subject to SDRT.
ADR termination:-
Most ADR programs are subject to possible termination. Termination of the ADR agreement will result in cancellation of all the depositary receipts, and a subsequent delisting from all exchanges where they trade. The termination can be at the discretion of the foreign issuer or the depositary bank, but is typically at the request of the issuer. There may be a number of reasons why ADRs terminate, but in most cases the foreign issuer is undergoing some type of reorganization or merger.
Owners of ADRs are typically notified in writing at least thirty days prior to a termination. Once notified, an owner can surrender their ADRs and take delivery of the foreign securities represented by the Receipt, or do nothing. If an ADR holder elects to take possession of the underlying foreign shares, there is no guarantee the shares will trade on any US exchange. The holder of the foreign shares would have to find a broker who has trading authority in the foreign market where those shares trade. If the owner continues to hold the ADR past the effective date of termination, the depositary bank will continue to hold the foreign deposited securities and collect dividends, but will cease distributions to ADR owners.
Usually up to one year after the effective date of the termination, the depositary bank will liquidate and allocate the proceeds to those respective clients. Many US brokerages can continue to hold foreign stock, but may lack the ability to trade it overseas.
Advantages of investing in ADRs:-
While investors in ordinary shares must often rely on local brokers based in the home exchange of the company to buy or sell shares of ordinary stock, ADRs can be bought and sold easily in the US. In addition, ADRs are denominated in dollars and also pay dividends in dollars, which eliminates (often costly) currency conversions. Another important advantage is that foreign companies which issue ADRs must comply with US securities laws and disclosures, which often provide more information and greater transparency for the investor (please note that issuers of Level One ADRs are not required to comply with SEC regulations). Lastly, there is evidence that the issuance of an ADR can potentially improve the liquidity of the stock in the home market.
Disadvantages of investing in ADRs:-
One of the main disadvantages of trading ADRs is that certain ADRs are not nearly as liquid as their ordinary shares, making it difficult to establish or sell a large position in a given ADR. In addition, while ADRs are dollar-denominated, they still expose investors to currency risk. Japanese ADRs, for instance, are made less valuable by a decline in the yen. Finally, ADRs sometimes trade at a premium to the ordinary share, so that investors must pay extra for the convenience of the ADR.
In terms of understanding the investor base of ADR holders, ADRs settle within DTC similar to regular stocks. Consequently, trading of ADRs can be tracked using similar methods to equity surveillance.
A frequent misconception in the marketplace is that there is a difference between ADRs and GDRs. There is absolutely no difference between an American Depositary Receipt and a Global Depositary Receipt. They work exactly the same way. What will happen is with a Level III ADR or with a private placement under Rule 144A of the Securities Act of 1933 (“Rule 144A” or “144A”), the underwriter will determine what to call the depositary receipt. If a big portion of the offering is taking place in Europe, the underwriter will call the depositary receipt a GDR, trying to get away from tainting the security by calling it an “American Security.” If the majority of the offering takes place in the United States, then the underwriter will call it an ADR.