ADRs and GDRs are not for investors in India – they can invest directly in the shares of various Indian companies.
But the ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying these, they can invest directly in Indian companies without going through the hassle of understanding the rules and working of the Indian financial market – since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy these using their regular equity trading accounts!
This is what happens: The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4).
These receipts are then sold to the people of this foreign country (and anyone who is allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks – their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company.
These receipts, which are traded like ordinary stocks, are calledDepository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares – that is, it stores the shares on behalf of the receipt holders.
Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded.
If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR.
If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.
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