Discover the Power of International Depository Receipts (IDR)
An International Depository Receipt (IDR) is a negotiable certificate issued by a bank. It represents ownership of a number of shares of stock in a foreign company that the bank holds in trust.
IDRs are often referred to as American Depository Receipts (ADRs) in the U.S. In Europe, they are known as Global Depository Receipts and trade on prominent exchanges such as London, Luxembourg, and Frankfurt. Notably, the acronym IDR is also used for Indian Depository Receipts.
Understanding IDRs
Investors purchase IDRs as an alternative to buying foreign stocks directly on foreign exchanges. For instance, American traders can buy shares of Swiss bank Credit Suisse Group AG or Swedish automaker Volvo AB directly from American exchanges via ADRs.
Key Takeaways
- An IDR or ADR represents ownership of a number of shares in a company that trades on a foreign exchange.
- Investing in IDRs is an alternative to purchasing stock on a foreign exchange.
- For companies, IDRs facilitate easier access to foreign investors.
For companies, IDRs simplify the process of reaching international buyers, bypassing the need to comply with the listing and regulatory requirements of every country where they wish to sell shares.
IDRs typically represent fractional ownership of the underlying stock, with each IDR equating to one, two, three, or ten shares. The IDR’s market price usually aligns closely with the value of the underlying shares on a currency-conversion basis.
Occasional price discrepancies present arbitrage opportunities, where traders exploit market inefficiencies by simultaneously purchasing and selling an asset to profit from price imbalances across various exchanges and currencies.
Special Considerations for IDRs
In 2019, the Securities and Exchange Board of India (SEBI) introduced new guidelines for listing depository receipts. These guidelines permit Indian companies to list depository receipts on selected foreign exchanges, including NASDAQ, NYSE, and the London Stock Exchange. This development marks a significant change, considering Indian companies could previously issue debt securities, known as masala bonds, on international exchanges but could not do the same for equity shares.
Likewise, the value of an ADR should align precisely with the value of the underlying stock. Minor discrepancies in prices across exchanges present arbitrage opportunities for traders.
Since its inception in 1992 and the beginning of trading in 1994, the National Stock Exchange of India (NSE) operates within the same trading hours and settlement processes as the long-established Bombay Stock Exchange (BSE), in existence since 1875.
Invest in global markets efficiently through International Depository Receipts and harness the potential of worldwide financial opportunities.
Related Terms: American Depository Receipt, Global Depository Receipt, Arbitrage.
References
- Business Insider India. “Sebi Notifies International Exchanges for Issuance of Depository Receipts”.
- Cyril Amarchand Mangaldas. “The SEBI Expert Committee for Listing of Equity Shares of Companies Incorporated in Indian on Foreign Stock Exchanges and of Companies Incorporated Outside of Indian Stock Exchanges”.
