Depositary Receipt
A Depositary Receipt (DR) is a financial instrument that represents shares in a foreign company, allowing investors to buy and trade shares of foreign companies in their domestic market without directly dealing with foreign exchanges. DRs are typically issued by a depositary bank, which holds the foreign company's shares and issues corresponding depositary receipts. Common types of depositary receipts include American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs). DRs provide investors with the opportunity to invest in international companies while mitigating the complexities and costs associated with cross-border transactions.
Definition: A Depositary Receipt (DR) is a financial instrument that represents shares in a foreign company. They allow investors to buy and trade shares of foreign companies in their domestic market without directly trading on foreign exchanges. DRs are typically issued by a depositary bank, which holds the foreign company's shares and issues corresponding DRs. Common types of DRs include American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs). DRs provide investors with opportunities to invest in international companies while reducing the complexity and cost of cross-border transactions.
Origin: The concept of Depositary Receipts first emerged in 1927 when J.P. Morgan created the first American Depositary Receipt (ADR) to help U.S. investors invest in the British company Selfridges. Since then, DRs have evolved into a significant tool for cross-border investment, especially as globalization has accelerated, allowing more companies to enter international capital markets through DR issuance.
Categories and Characteristics: Depositary Receipts are mainly divided into two categories: American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs).
- American Depositary Receipts (ADRs): Primarily traded in the U.S. market, ADRs are classified into Level I, Level II, and Level III, each corresponding to different listing requirements and disclosure standards. Level I ADRs typically trade in over-the-counter (OTC) markets, while Level II and Level III ADRs are listed on major stock exchanges.
- Global Depositary Receipts (GDRs): Traded in multiple countries' securities markets, GDRs are more common in European and Asian markets. GDR issuance and trading are relatively flexible, making them suitable for companies looking to raise funds in multiple international markets.
Specific Cases:
- Case 1: Alibaba Group issued American Depositary Receipts (ADRs) in 2014 to list on the New York Stock Exchange, becoming one of the largest IPOs globally at the time. Through ADRs, Alibaba successfully attracted significant attention and capital from U.S. investors.
- Case 2: Gazprom, a Russian energy giant, issued Global Depositary Receipts (GDRs) to list on the London Stock Exchange, enabling European investors to conveniently invest in the company.
Common Questions:
- Question 1: Are the trading fees for Depositary Receipts higher than directly purchasing foreign stocks?
Answer: Trading fees for DRs typically include depositary bank management fees and transaction commissions, but overall, they may be lower than the costs of directly trading on foreign markets, especially considering currency conversion and the complexity of cross-border transactions. - Question 2: Do Depositary Receipts have the same shareholder rights as the original shares?
Answer: DR holders generally enjoy similar shareholder rights as original share holders, such as dividends and voting rights, but specific rights may vary depending on the depositary agreement.
