c


 

 

An c


 

  (abbreviated c) represents ownership in the shares of a
non-U.S. company that trades in U.S. financial markets. The stock of many non-US companies
trade on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to buy
shares in foreign companies without the hazards or inconveniences of cross-border & cross-
currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be
traded like the shares of US-based companies.

An ADR is a security that represents ownership of shares of a foreign company. When you buy
an ADR, you technically don't own the foreign stock directly. Instead, you own a piece of paper
that entitles you to one or more shares of a foreign stock being held on your behalf at a
depositary bank.

The first ADR was created in 1927 by J.P. Morgan, to allow Americans to invest in shares of
Selfridges, a British department store. Today there are more than 2,200 ADRs available,
representing shares of companies located in more than 70 countries. The Bank of New York,
JPMorgan, Deutsche Bank and Citigroup are among the leading depositary banks, which create
and issue ADRs.

The popularity of ADRs has surged over the years because they have a number of distinct
advantages that appeal to both small investors and professional money managers alike.

c

c

÷? ADRs can be bought and sold just like shares of IBM or Coca-Cola.
÷? You don't need a foreign brokerage account or a new broker; you can use the same broker
that you normally deal with.
÷? Prices for ADRs are quoted in U.S. dollars, and dividends are paid in dollars.
÷? ADRs trade during U.S. market hours and are subject to similar clearing and settlement
procedures as American stocks.
÷? You can customize your portfolio however you like, depending on which countries or
sectors you are interested in.



c

By the same token, ADRs have some important limitations and drawbacks.

÷? -imited selection: Not all foreign companies are available as ADRs. For example, Japan's
Toyota Motor has an ADR, but Germany's BMW does not.
÷? -iquidity: Plenty of companies have ADR programs available, but some may be very
thinly traded.
 ÷? ‰xchange rate risk: While ADRs are 
 in dollars, for sake of convenience, your
investment is still exposed to fluctuations in the value of foreign currencies.
÷? Because ADRs are like stocks, you need to buy enough of them to ensure adequate
diversification. So if you don't have enough investment capital to spread around, say 25
to 30 ADRs (or more), you won't be able to create a truly diversified portfolio on your
own.

Procedures and mechanism of issuing ADRs

÷? ADRs are issued by a U.S. bank, such as J. p. Morgan or the Bank or New York, which
functions as a depository, or stock transfer and issuing agent for the ADR program.
÷? The foreign, or local shares, remain deposit with the depository¶s custodians. The bank
will act as custodian for the trust handling dividend distribution, currency exchange,
proxies, tax reporting, and regulatory filings.
÷? ‰ach ADR is backed by a specific number of an issuer¶s local shares ( e.g. one ADR
representing one share or ten shares etc.). This is the ADR ratio which is designed to set
the price of each ADR in dollars.
÷? Financial information, including annual reports and proxies are delivered to US holders
on a consistent basis by the depository. The dividends are converted into dollars and paid
to ADR holders by the depository.

-
 

-
  

 
 
 




-
  




How are ADR priced?

÷? -et us assume that Russian Vodka -td. Trades on a Russia stock exchange at 127 Russian
roubles
÷? This is suppose equivalent to USD 4.58
÷? Now, a US bank purchases 30 million shares of Russian Vodka -td. And reissues them in
the US market at a ratio of 10:1
÷? This means that each ADR one purchases is worth 10 shares of Russian Vodka -td. On
Russian stock exchange.
÷? A quick calculation tells us that each ADR should have issue price of USD 45.80- since
10 shares equal to 1 ADR
 ÷? Once an ADR is priced and sold, its subsequent price is determined by supply and
demand factors, like any ordinary shares.

Following are a few Indian ADRs trading in U.S.

The first India-registered company that issued ADRs was Infosys Technologies in 1999.
Through the issuance, the company got listed on the NASDAQ stock exchange. After Infosys,
many companies including Wipro, Satyam Computers, Dr.Reddy -abs, HDFC bank, ICICI bank
and Sterlite Industries used ADRs to raise funds from the U.S. market.

GDRs were used by Indian companies even before using ADRs. Reliance Industries was the first
company which issued GDRs in 1992. In 1997, Videsh Sanchar Nigam, -td (VSN-) and
Mahanagar Telephone Nigam -td (MTN-) offered GDRs to global investors.
Bibliography

Internet ±

www.wikepaedia.com

www.scribd.com

www.beginnersinvest.about.com

Books-

Investment analysis and portfolio management ± Prasanna Chandra