Depository Receipts

In our last article we tried to give a very clear picture of FCCB, one of the External Commercial Borrowing (ECB) instruments used by the Corporates. Through this article we would like to cover another very important ECB tool which is Depository Receipts.

What is Depository Receipts?

As the name itself suggests it’s a Receipt of Deposit of something and this something in this case is equity shares. A company willing to raise money from Foreign Investors issues such deposits equivalent to the total number of shares deposited with the custodian bank of the country in which the Depository Receipts are to be issued.

The process of issuing of Depository Receipts

Let’s consider a case of a company from India raising money from Russia. After fulfilling certain regulatory requirements, the company can go ahead with the process of the Receipts. For issuing of Depository Receipts the company keeps it certain number of shares with the Indian branch of the Custodian Bank of Russia. After the receipt of the shares the Indian branch confirms it to the Russian Headquarters which then issues the Receipts of Deposits to the company. These are denominated in the Russian Currency (Ruble) and are converted according to the INR to Ruble exchange rate. The Deposit Receipts are issued according to a Depository ratio i.e. each depository specifies the number of shares of the company it represents. Then the company can issue these Receipts in Russia and raise money. After the issuing process is done the Depository Receipts are listed on the stock exchange of Russia and are traded like any other normal share listed on the Exchange.

Some salient features:

· The Depository Receipts holders are not the equity holder for the company.

· The equity holder is the custodian bank of the country and they receive the dividend declared by the company and then they are entitled to distribute it to the Depository Receipts Holder.

· The holders of Depository Receipts don’t have voting rights.

Benefits to the issuing company:

· Very useful instrument to borrow internationally from investors who due to some reason are not able to invest in the Country of the issuing company.

· Gives the issuing company recognition and branding in the country issued and this can be leveraged if the company plans to start its operations in the country.

· Increased prestige in the local market.

Benefits to the Investors in such Receipts:

· There might be a barrier by the Home Country, of the company, which restricts foreign investment. Thus this facilitates them to invest in the companies of such countries.

· This gives them an opportunity to diversify their portfolio internationally and thus reap the benefits of it.

These Depository Receipts have different names which are according to the Country in which they are issued.

· Global Depository Receipts (GDR) or European Depository Receipts (EDR): Depository Receipts issued in European Countries, denominated in Pound or Euro and traded on International Order Book of the London Stock Exchange and other European Exchanges respectively.

· American depository Receipts (ADR): Depository Receipts issued in America, denominated in USD and traded on America’s Stock Exchange

· Chinese Depository Receipts (CDR): Depository Receipts issued in China, denominated in Yuan and traded on China’s Stock Exchange.

· Indian Depository Receipts (IDR): Depository Receipts issued in India, denominated in INR and traded on India’s Stock Exchange