2. What is ADR Certificates that represent shares of a foreign stock owned and issued by a U.S bank They buy up shares of the foreign stock and repackage them into securities which can be traded on the NYSE, NASDAQ or AMEX. The foreign shares are usually held in custody overseas, but the certificates trade in the U.S. They provide easy access to gaining international equities exposure without actually having to exchange currencies and open additional accounts to transact in overseas GMP, XLRI, Jamshedpur
3. TYPES OF ADR Level 1 – Basic, common, traded on OTC, least regulation, no US accounting standard, no annual reports Level 2 – Listed on stock exchange, higher trading volumes Level 3 – Most rigorous regulations, go as far as raising capital from US investors If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. GMP, XLRI, Jamshedpur
4. GDRs and IDRS If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt GDR gives access to two or more markets ADRs and GDRs are an excellent means of investment for NRIs & foreign nationals wanting to invest in India IDR is instrument in form of Depository Receipt created by the Indian depository in India against the underlying equity of investing company. Foreign companies Issue shares, to Indian Depository Issue depository receipts. The actual shares underlying the IDRs held by Overseas Custodian. GMP, XLRI, Jamshedpur
7. How to price ADR Each ADR represent a single share, a fraction of shares or multiple shares. The depository bank sets the ratio of US ADRS per home country share. Ratio can be =1,<1 and >1 Once ADR priced & sold in the market, its price moves based on the market conditions GMP, XLRI, Jamshedpur
14. Reasons why ADR’s was overpriced Excess demand with limited supply of ADR’s. Few opportunities in the US to invest in companies that are growing at the 20–30% rates Official barriers prevent foreign investors from buying the shares trading in India Returns are negatively correlated with other assets held by them. ADR’s provides a value added layer – transparency, liquidity and greater coverage than the existing Indian stock. GMP, XLRI, Jamshedpur
17. Factors Inducing Differences in Returns between Domestic Shares and ADRs Time Difference Exchange Rates Market Friction and Trading Restrictions Macro Events GMP, XLRI, Jamshedpur