American Depository Receipt and its uses.

MERICAN DEPOSITORY RECEIPTS (ADRs):-

Depository receipt issued by a company in the United State of America is known as American Depository Receipts which is govern by Securities and Exchange Commission of USA.
An ADRs is generally created by the deposit of the securities of an non united states company with a custodian bank in the country of incorporation of the issuing company.
The custodian bank informs the depository in the U.S. that the ADRs can be issued. ADRs are united states dollar denominated and are traded in the same way as are the securities of the U.S. companies.

Several variation on ADRs have developed over time to meet more specialized demands in different market. One such variation is the GDR which are identical in structure to an ADR, the only difference being that they can be traded in more than one currency and within as well as outside the United state.

There are three types of ADRs which are shortly described as below:-

i. Un-sponsored ADRs: These are issued without any formal agreement between the issuing company and the depository, although the issuing company must consent to the creation of the ADR facility. Under this, certain costs including those associated with disbursement of dividends are borne by the investor. They are exempted from most of reporting requirements of the securities and exchange commission.

ii. Sponsored ADRs : These are created by a single depository which is appointed by the issuing company under rules provided in a deposits agreement. There are two broad types of sponsored ADRs, those that are restricted with respect to the types of buyer which is allowed and are therefore privately placed and those that are unrestricted with respect to buyer and are publicly placed and traded.

Restricted ADRs are allowed to be placed only among selected investors and face restriction on their re-sale. As those are not issued to general public, they are exempted from reporting to the commission and are not even registered with them.
Unrestricted ADRs are issued to and traded by the general investing public in US capital market. There are three classes of UR ADR’s , each increasingly demanding in terms of reporting requirement to the commission as well as attractive in terms of degree of visibility provided.

Level 1 UR ADR,s are exempted from confirming their financial statistic to the US SE commission . Generally accepted accounting principles (GAAP) as well as from full reporting to the commission resulting a low cost.

Level II UR ADR,s are generally issued by companies that wish to be listed on one of the US National Exchanges. The issuing company must meet the full requirement of Securities and Exchange commission’s. They are therefore most costly for the issuing company but the public listing allows much higher visibility and makes the facility more attractive to potential investors.

Level III UR ADR’s are issued by companies which seek to raise capital in the US Security market by making a public offering of their securities. They must also make full securities and Exchange commission’s disclosure, confirm to US GAAP and meet relevant exchange requirements and provide highest degree of visibility of any ADR.
As per the estimates, the cost of preparing and filing US GAAP Accounts only ranges from $ 500000 to $ 1000000 with the ongoing cost of $150000 to $ 200000 per annum. Because of the additional work involved, legal fees are considerable higher for an US listing, which ranges between $ 250000 to $ 350000 for the underwriter, to be reimbursed by the issuer.

In addition the initial securities Exchange commission registration fees which are based on a percentage of the issue size as well as “blue sky” registration cost for traded in all state of US will have to be met. For increasing legal problem and cost involvement Indian company’s are shifting from ADR’s to GDR’s investment.
Hence one should know about the details of this instrument for taking the benefit from international market.
Aparna