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5 things you should know about depository receipts
You may have read recently that Infosys plans to delist its ADRs from the stock exchanges in London and Paris. It may have been a relatively small news in a week that saw big ticket announcements from the US Federal Reserve and Donald Trump. But you would have read in the past too about Infosys making such a decision.
Many investors may have wondered what ADRs are and if the news matters to you. Truth be told, the news may not affect you directly. After all, you are a domestic investor buying and selling Infosys shares in the Indian market.
But it may be in your interest to know what Depository receipts are. That’s because many experts recommend you to diversify your investments while creating your investment portfolio. Investing in equities of other countries could be a good way to accomplish this goal.
However, many times, you’ll find that the shares of these companies are not listed on your local stock exchange. No problem. It may still be possible to invest in these securities through depository receipts.
That’s what we discuss in this week’s Meaningful Minutes—the five important things you need to know about depository receipts:
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What are depository receipts?
Depository Receipts or DRs are negotiable financial instruments that represent the publicly traded securities of a foreign company. Many news reports call these the Depository Shares (DSs) too. These receipts are issued by a bank and are traded on a local stock exchange. Here, it is important to note that the actual foreign company is neither listed nor traded on the exchange. The underlying shares would be held by another custodian bank in the home country of the company issuing the depository receipts.
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Rise in interest rates:
Buying and selling of foreign securities is a complex issue. It involves many legal technicalities. As a result, ADRs were introduced as an alternative in order to simplify this problem. When a company from one country wishes to list its shares for trade in another country’s stock exchange, it sets up a Depository Receipt (DR). America introduced this concept as early as 1927.
The American Depository Receipts or ADRs allowed American investors to purchase securities issued by companies outside the US. If the receipt is traded in any other country outside the US, it is called as Global Depository Receipt (GDR). Similarly, Indian investors can purchase securities of global companies through Indian Depository Receipts (IDRs). (Click here to read more about GDRs) -
Role of Depository banks
Depository banks play a major role in the transfer and trading of foreign securities. A company that wishes to create DRs should deposit its shares with the depository bank. This bank bundles the shares and reissues them as depository receipts to the investors. DRs can then be traded normally in the market like regular stocks. Depository banks also have the important role of ensuring that investors receive their capital gains and dividends on time.
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Benefits of investing
Buying stocks of international companies can be complex. In many cases, brokerages do not allow investors to gain direct access to overseas markets. In this situation, IDRs allow Indian investors to access stocks of global companies easily. This also contributes towards diversification of the portfolio. There is a lot of potential in other emerging markets like Brazil or Indonesia. Investors can easily tap these opportunities through IDRs.
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Who can invest?
Any person in India who is registered as an Indian national can invest in IDRs. Non-resident Indians (NRIs) too have access to invest in IDRs. The minimum amount that can be invested in an IDR is Rs 20,000 and the maximum investment amount applicable for retail investors is Rs 2 lakh. You can participate in the issue of an IDR just like any other Initial Public Offer (IPO) in the country. And since IDRs bear the regular risk that a stock carries, it is important to study the company’s fundamentals before investing in an IDR.
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$500 million
IDR guidelines suggest a company that wishes to issue IDRs should have an annual turnover of $500 million. In addition, the company should show a five-year profit record; declaring a 10% dividend during this period. Currently, Standard Chartered is the only company that issues IDRs in the country.
