Depositary receipt

A depositary receipt is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange.

Depositary receipts make it easier to buy shares in foreign companies because the shares of the company don't have to leave the home state.

When the depositary bank is in the U.S., the instruments are known as American Depositary Receipts (ADRs). European banks issue European depositary receipts, and other banks issue global depositary receipts (GDRs).^[1]

How it works

A depositary receipt typically requires a company to meet a stock exchange’s specific rules before listing its stock for sale. For example, a company must transfer shares to a brokerage house in its home country. Upon receipt, the brokerage uses a custodian connected to the international stock exchange for selling the depositary receipts. This connection ensures that the shares of stock actually exist and no manipulation occurs between the foreign company and the international brokerage house.

A typical ADR goes through the following steps before it is issued^[2]:

• The issuing bank in the US studies the financials of the foreign company in detail to assess the strength of its stock.
• The bank buys shares of the foreign company.
• The shares are grouped into packets.
• Each packet is issued as an ADR through an American stock exchange.
• The ADR is priced in dollars, and the dividends are paid out in dollars as well, making it as simple for an American investor to buy as the stock of a US based company.

Types

• American Depositary Receipt
• European Depositary Receipt
• Luxembourg Depositary Receipt
• Global Depositary Receipt
• Indian Depository Receipt

Additionally, CREST Depositary Interests (CDIs) in the United Kingdom function similarly, but not identically to depositary receipts.

References