The ADR & GDR and the differentiation

What is ADR and GDR

[American Depository Receipts and Global Depository Receipts]

Indians are known world over for their regular savings habit. We have imbibed this very healthy habit from our forefathers who practiced it in their own way throughout their life, and lived a safe and satisfactory retired life due to this habit.

In this generation too the same habit is widely prevalent. We invest in traditional savings like Bank Deposits, Mutual Funds, and many such avenues. The latest being, investments in stocks and shares. In the last two decades people investing and trading in stocks and shares of various companies that are listed on most of our stock exchanges that are spread across India, has become a regular means of earning extra income, or a means of creating savings in the near future.

What if the companies whose shares are publicly traded on stock exchanges wishes to expand its fundraising capacities to opportunities to raise funds from people from other countries. This is where ADR and GDR come into the picture.

What is ADR?

ADR is the full form of American Depository Receipts. This is the recent method adopted by many large and well respected companies from India to raise funds from American Markets.

How ADR Operates?

Indian companies have direct access to raise funds from Indian public by way of issuing Shares, Debentures etc. However, Indian companies cannot do so, in such a direct manner, when it comes to raising funds from the American people. That would entail the Indian companies to adopt US Accounting Norms which are also called as GAAP, maintain accounting practices as per American Financial Year (Which starts in January and ends in December of any particular year), as also follow a variety of stringent standards as per American norms. Effectively, it would mean that the Indian company would have to follow two different sets of rules simultaneously, one to comply with the laws of Indian Companies Act, and the other to comply with the American Laws.

The method to circumvent the American norms, but still raise funds from the American people is available by way of ADR or American Depository Receipts. In this system, the Indian company deposits a certain amount of its Indian shares with designated American Banks. The banks, in turn, issue receipts that are equivalent in values (And also based on the intrinsic value the Indian Company’s shares would fetch in the American market) to the Indian Company. These receipts essentially would be in number of receipts. Then these Indian Companies can trade these ADRs or American Depository Receipts with the American public. These ADRs can be purchased and traded freely without any encumbrances in the American Stocks and Shares Market. This way the Indian company is able to enter into the American Stocks and Shares market, and raise funds from the American public.

The role of the American bank which has issued these receipts is very crucial, since it is they who stand guarantee to the issued receipts. Hence they do an exhaustive study of the Indian company from all perspectives, and only then issue the ADR to the Indian company.

What is GDR and how it operates?

The full form of the GDR is Global Depository Receipt. It is not a different financial instrument, as it may sound, from that of ADR. In fact if the Indian Company which has issued GDRs in the American market wishes to further extend it to other developed and advanced countries such as Europe, then they can sell these ADRs to the public of Europe and the same would be named as GDR.

Indian Companies with ADR & GDR

There are quite a lot of successful Indian companies that have now issued ADRs and GDRs. Some such companies are given underneath.

• Dr. Reddys
• HDFC Bank
• ICICI Bank
• Infosys Technologies
• MTNL
• VSNL
• WIPRO

The major differences between ADR & GDR : -

1. Global depository receipt (GDR) is compulsory for foreign company to access in any other country’s share market for dealing in stock. But American depository receipt (ADR) is compulsory for non –U.S. Companies to trade in the stock market of USA.
2. ADRs can get from level -1 to level –III. GDRs are already equal to high preference receipt of level –II and level –III.
3. Indian companies prefer to get GDR due to its global use for getting foreign investment for own business projects.
4. ADRs up to level –I need to accept only general condition of SEC of USA but GDRscan only be issued under rule 144 A after accepting strict rules of SEC of USA.
5. GDR is negotiable instrument all over the world but ADR is only negotiable in the USA.
6. Many Indian Companies listed foreign stock market through the foreign bank’s GDR.

The names of these Indian Companies are following:-

• Bajaj Auto
• Hindalco
• ITC
• L&T
• Ranbaxy Laboratories
• SBI

Some of Indian Companies are listed in USA stock exchange only through ADRs:-

• Patni Computers
• Tata Motors

Some more differences are like:

1. Even both GDR & ADR is the proxy way to sell shares in foreign market by India Companies ADRs is not substitute of GDRs but GDRs can use on the place of ADRs.
2. Investors of the UK can buy GDRs from London stock exchange and the Luxemburg stock exchange and invest in Indian companies without any extra responsibilities. Investors of USA can buy ADRs from New York stock exchange (NYSE) or NASDAQ (National Association of Securities Dealers Automated Quotation).
3. American investors typically use regular equity trading accounts for buying ADRs but not for GDRs.
4. The US dollar rate paid to holders of ADRs is calculated by applying the exchange rate used to convert the foreign dividend payment (net of local withholding tax) to US dollars, and adjusting the result according to the ordinary share but GDRs is calculated on numbers of Shares. One GDR's Value may be about two or six shares.