American Depository Receipt (ADR) is a certified negotiable instrument issued by an American bank suggesting the number of shares of a foreign company that can be traded in U.S. financial markets. They pay dividends in US dollars and trade like regular shares of stock.
Some ADRs are traded on major stock exchanges such as the NASDAQ Stock Market and the New York Stock Exchange, which require these foreign companies to conform with many of the same reporting and accounting standards as U.S. companies.
ADR fee varies from one cent to three cents per share depending upon the ADR amount and its timing.
TYPES OF AMERICAN DEPOSITORY RECEIPTS
The ADRs that are sold in US financial markets can be categorized into following 2 categories :-
- SPONSORED ADR :- Sponsored ADRs are issued by banks on behalf of the foreign company where there exists the legal arrangement between the two parties. In this case, the transactions with the investors will be handled by the bank while the cost of issuing ADRs and control of ADR will be of foreign company. Sponsored ADRs can be listed on the US stock exchanges.
- NON – SPONSORED ADR :- A bank also issues an unsponsored ADR. However, this certificate has no direct involvement, participation or even permission from the foreign company. These are traded in US over-the-counter markets without requiring registration with the Securities and Exchange Commission (SEC) & are never included for voting rights.
LEVELS OF ADR’s
ADRs are grouped into three levels depending on the extent of the foreign company’s access to the US trading market. These are :
- SPONSORED LEVEL 1 – Thisis the most basic type of ADR where foreign companies either don’t qualify or don’t want to have their ADR listed on an exchange. Level I ADRs are subject to the least reporting requirements with the Securities and Exchange Commission, and they are only traded over the counter.
- SPONSORED LEVEL 2 – As with Level I ADRs, Level II ADRs can be used to establish a trading presence on a stock exchange, and they can’t be used to raise capital. These ADRs have more requirements from the SEC than Level I & if the issuer fails to comply these requirements it may get delisted to level I.
- SPONSORED LEVEL 3 – Level III is the highest and most prestigious level that a foreign company can sponsor. With these, an issuer floats a public offering of ADRs on a U.S. exchange. Level III ADRs can be actively promoted and advertised to increase investor awareness and market Liquidity
ADVANTAGES OF ADR’s :
- The American investor can invest in foreign companies which can fetch him higher returns.
- Enhances visibility and global presence among investors, consumers and customers.
- Improves communication with shareholders globally.
- These ADR’s also offer portfolio diversification to the investors.
Thus, in simple words an American depositary receipt (ADR) is a certificate issued by a U.S. bank that represents shares in foreign stock .