ADRs stands for “American Depository Receipts.” It is a financial instrument used to facilitate the trading of foreign stocks in U.S. financial markets. ADRs are essentially certificates issued by U.S. banks that represent ownership of shares in a foreign company. They allow U.S. investors to invest in foreign companies without having to directly purchase the foreign stock.
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How ADRs work
- Foreign Company: A company based outside the United States wants to make its shares available to American investors. However, these shares may not be easily tradable on U.S. stock exchanges due to differences in regulations, currencies, and market practices.
- U.S. Bank: The foreign company enters into an agreement with a U.S. bank to create ADRs. The bank holds the foreign company’s shares in the home country and issues ADRs in the United States, which represent these shares.
- ADR Trading: These ADRs are then traded on U.S. stock exchanges, just like regular stocks. American investors can buy and sell ADRs as if they were investing in a U.S. company
There are different levels of ADRs, which determine the degree to which the foreign company has met U.S. regulatory requirements:
Level I ADRs: These are the simplest form of ADRs. The issuing company doesn’t need to comply with U.S. Securities and Exchange Commission (SEC) reporting requirements. They are traded over-the-counter (OTC) and have the least stringent listing requirements.
Level II ADRs: Companies issuing Level II ADRs are required to register with the SEC and meet its reporting standards. These ADRs are listed on U.S. stock exchanges, making them more visible and accessible to investors.
Level III ADRs: Level III ADRs are similar to Level II, but they are used when the foreign company wants to raise capital in the U.S. These ADRs are registered with the SEC and can be used in public offerings.
Diversifying across these categories helps manage risk while pursuing decent returns.
Indian companies that have American Depository Receipts
There are several Indian companies that have American Depository Receipts (ADRs) traded on U.S. stock exchanges. Some well-known Indian companies with ADRs include:
- Tata Motors Limited
- Infosys Limited
- Wipro Limited
- ICICI Bank Limited
- HDFC Bank Limited
- Axis Bank
- Dr. Reddy Labs
- MakemyTrip
- Vedanta
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