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Process of getting an ADR. Synopsis. What is ADR?? Types of ADR Why ADR?? Process of getting an ADR. What is ADR??. An American Depository Receipt is a certificate issued by a bank in the United States representing a certain amount of shares of a foreign company on a foreign exchange.
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Synopsis • What is ADR?? • Types of ADR • Why ADR?? • Process of getting an ADR
What is ADR?? • An American Depository Receipt is a certificate issued by a bank in the United States representing a certain amount of shares of a foreign company on a foreign exchange. • They can be traded on American exchanges just as a domestic stock can be; they make foreign investment much easier.
Example. • ADRs were first introduced in 1927
Types of ADR • Sponsored ADR’s: These ADR’s are created by a bank at the request of the foreign Co. that issued the underlying security. Accounts for over 98% of ADRs 2. Unsponsored ADR’s Unsponsored shares are ADRs that trade on the over-the-counter (OTC) market. These shares have no regulatory reporting requirements and are issued in accordance with market demand.
Why ADR? • ADR’s are denominated in dollars, and can be purchased through the investor’s regular broker. • Dividends are converted to dollars by the custodian and paid to the ADR investor. • ADR price quotes are in US dollars.
ADR’s are registered securities that provide for the protection of ownership rights. • ADR investment can be sold by trading the depository receipt to another investor in the U.S. stock market. • ADR’s represent a multiple of the underlying shares.
Disadvantages • There are some ADR’s that are not listed on large exchanges like NASDAQ or NYSE. They are listed on bulletin boards. • Accounting system may differ. • Fluctuation in currency. • Inflation. • Well informed about Foreign tax treatment.
Process of getting an ADR • Two banks are generally involved in maintaining an ADR on a US exchange: • An investment bank and • A depositary bank.
Process of Creating ADRs DR bank purchases shares of non-U.S. company from the company’s home market DR bank places shares with its custodian in the home market DR bank issues ADRs (denominated in U.S. $)
Stages Involved in ADR • The company shall present its accounts in conformity with US GAAP. US GAAP requires presentation of consolidated financial statements. • Appointment of legal experts, lead managers, investment bankers and their due diligence. • Preparation of the offer document and its vetting by legal counsels. • Filing of the offer document and its review by SEC. • Replying to the comments of SEC and obtaining its clearance. • Road shows and book running. • Appointment of domestic and international depositary. Domestic depositary will act as a custodian of the underlying shares. • Selection of an American Stock Exchange. • Allotment of underlying shares and creation of ADSs. • Listing of ADSs on American Stock Exchange. • Listing of underlying shares with domestic Stock Exchanges