What is an American Depository Receipt explain with an Example?

An ADR or American Depository Receipt is a negotiable instrument issued by a U.S bank representing a specific number of shares of a foreign stock traded on a U.S stock exchange. ADRs make it easy for the Americans to invest in other foreign companies. They also enable the investors to invest in Non-US securities without any hazzle, complex and expensive cross-border transactions. The ADR also offer substantially the same economic, corporate and voting rights enjoyed by the domestic shareholder of the Non – issuer and they are considered as US securities.

This will be more understandable with an example- Company XYZ situated in U.S.A wants to raise fund from other foreign countries and issue ADR to overseas depository bank which later issues shares to the investor of foreign companies. Investors can purchase ADRs from Depositor Participants or broker. The ADR is issued and paid in dividends in U.S dollars making them a good way for a domestic investor to purchase shares of a foreign company without any complexity in currency conversion.

American Depository Receipt Procedure

·   The local listed domestic company sells its bulk shares to U.S bank to get itself listed on U.S exchange

·     The U.S banks accept the shares of the company who issued it and then the bank keeps the shares in its security and issues certificate to the Interested investors through the exchange.

Securities Exchange Commission regulates the U.S stock exchange and keeps a check on the necessary compliances that ought to be compiled by a foreign company.

Conclusion

American Depository Receipt provides the US investors the ability to trade around the world and makes it very easy and convenient for all domestic investor in the US to trade in foreign companies shares.