DEPOSITORY RECEIPTS

According to Investopedia,  a depository receipt is a type of negotiable financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company.In other words, it is a negotiable financial instrument which represents a company’s publicly traded debt or equity.Depository receipts enable the investors to hold share in equity of foreign countries.

Depository receipts are created when a company’s shares are delivered to a depository’s custodian bank, which instructs the  depository to issue the receipts.Trade of foreign securities has been facilitated by depository receipts.They are either traded on an exchange or over the counter market and are used to raise capital.In general, depository receipts are issued for every ten shares, but the customization of this ratio could be  done.A depository receipt requires a company to meet the prerequisite conditions of a stock exchange prior to the enumeration of its stock for sale.

Types of Depository Receipts:

*American Depository Receipts- These are the receipts which represents shares of a foreign stock , owned and  issued by an American bank.In general, the foreign shares are possessed by the custodians overseas but, the  certificates trade in the united states.ADRs give the United State’s investors the capability to purchase shares in  the foreign business units,and it makes the purchasing of shares much more expedient and economically viable for  domestic investors.ADRs are denominated in dollars and were first launched in the market by J.P. Morgan in  1927.

*Global Depository Receipts- These are negotiable instruments meant for raising equity in the international    financial markets.They are created by overseas depository banks which are authorised by issuing companies to  issue GDRs outside the country.They can be listed in any overseas stock exchange and may be purchased and    transferred by non-residents in foreign currency.

*Indian Depository Receipts- In the same way as ADRs in U.S., these receipts are listed in India and are  denominated  in Rupees.It gives the domestic investors, the right to become owners of the shares overseas.A  depository bank issues these and the security of them are assured by a custodian.

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