Your money: you can invest in ADR and GDR in India

By trading ADRs you get capital appreciation in the US market and also benefit from the appreciation of the US dollar against the rupee

By Sunil Parameswaran

For most investors in this world, American Depository Receipts (ADR) and Global Depository Receipts (GDR) are either the only or the best ways to invest in global stocks while trading in their own home market. That is, a US resident can buy shares of German companies trading in Germany. However, if he wishes to trade German stocks denominated in US dollars, then the only option is through ADRs.

ADRs are receipts issued by a custodian bank that are backed by a specified number of foreign securities. Similar securities in other financial markets are called Global Depository Receipts (GDR). In the EU, they are called EDR, i.e. Euro Depository Receipts.

World titles
An average American retail investor tends to trust ADRs because they are issued by actors like JP Morgan or Bank of New York, institutions that reassure them. Thus, the feeling that a certain due diligence has been carried out by an American financial institution encourages these investors to invest in ADRs. Additionally, ADRs are traded in dollars and pay dividends in dollars. This shields US investors from currency risk, a factor many of them are uncomfortable with.

Some US institutional investors are permitted to invest in foreign companies using only the ADR channel. It is therefore the only avenue available for these entities, if they wish to invest in foreign companies.

Discovery price
From an issuer’s perspective, some markets are viewed as specialists in certain industries, and therefore companies believe that better price discovery will occur if their securities are listed on such markets. For example, Canada has a large and well-developed mining industry. As a result, many foreign mining companies have issued deposit receipts listed on the Toronto Stock Exchange.

For good companies based in developing countries, the ADR issuance process makes them more transparent, requiring them to adhere to US GAAP and SEC, NYSE and NASDAQ guidelines. Greater disclosure benefits not only potential foreign investors, but also current and future domestic investors. For these companies, such a listing improves their acceptance in global financial markets, as was the case for NRI spouses in India before liberalization. For example, a software company seeking a loan in London will be taken more seriously if it is listed on the NYSE rather than the NSE alone.

Indian investors can invest in ADRs and GDRs, sitting in India. This makes it easier to invest in the best global companies that are not currently listed on the BSE and NSE. Using a platform such as Global Invest in ICICI Direct, an Indian investor can trade ADRs on European, Japanese and foreign companies.

For most Indian investors, there are two sources of return on such investments. First, they get capital appreciation in the US market. Second, the US dollar steadily appreciates against the Indian rupee. Hence, dividend payments and capital gains tend to be magnified when converted into Indian currency.

The author is CEO of Tarheel Consultancy Services

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