International Depository Receipt

A global depository receipt or international depository receipt (IDR) issued by a bank is a negotiable certificate. It denotes the bank’s ownership of a number of shares of stocks in a foreign company.

International depository receipts are more commonly known as American depository receipts in the United States (ADRs). All across Europe, they are known as global depository receipts and are traded in Luxembourg, London, Frankfurt, and other stock exchanges. 

IDR is a shortened form of Indian depository receipts.

Indian Depository Receipts 

After understanding what global depository receipts are, it’s time we know what IDR is. A global depository receipt-like financial instrument that is denominated in Indian Rupees is known as the Indian depository receipt (IDR). The IDR is a subset of global depository receipts that are only accessible in India.

For foreign companies to gain funds from the security markets of India, it is formed by a domestic depository, which is also known as the custodian of securities registered with the Securities and Exchange Board of India for the companies underlying issuing equity. 

Foreign companies’ IDRs will be deposited in an Indian depository. The depository would issue receipts to Indian investors in exchange for these shares. The benefits from the underlying shares (such as bonuses and dividends) would be distributed to Indian depository receipt holders.

The American Depositary Receipt

An American depositary receipt (ADR) is a type of negotiable certificate issued by a U.S. depositary bank that represents a specified number of shares, typically a single share, of a foreign company’s stock. In the United States, the ADR is traded on the same stock exchanges as any other domestic share.

IDR 

Investors purchase IDRs as an alternative to directly purchasing foreign stocks with foreign exchanges. American traders, for example, will be able to purchase shares of the Suisse Group Swiss Bank Credit AG or the Automaker Volvo Swedish AB from the exchanges of America right from the ADRs.  

Highlights

• An international depository receipt, IDR, or ADR is a certificate proving ownership of a certain number of shares in a company that trades on a foreign exchange.
• Purchasing stock on a foreign exchange is an alternative to investing in IDRs.
• It provides companies with greater access to foreign investors.
• The international depository receipt makes it easier and less expensive for businesses to reach out to international buyers. 
• The company is not required to meet all of the listing and regulatory requirements of each country where it wishes to sell its shares.
• The IDR facilitates and reduces the cost of reaching out to international buyers for businesses. 
• The company is not required to meet all of the listing and regulatory requirements of each country where its shares are to be sold.
• International depository receipts are basically used to represent fractional ownership of the underlying stock, with one, two, three, or ten IDRs representing one, two, three, or ten shares, respectively. In terms of currency conversion, the IDR typically trades close to the value of the underlying shares.
• Price divergences are sometimes used to find arbitrage opportunities. Arbitrage is the simultaneous purchase and sale of an asset in order to profit from a price differential on different exchanges and currencies. 
• The trade takes advantage of price differences between financial instruments that are identical or nearly identical.

Special Considerations for IDRs

In 2019, India’s capital market regulator, the Securities and Exchange Board of India (SEBI), issued new guidelines for companies listing depository receipts. The guidelines permit Indian companies to list their depository receipts on a limited number of overseas transactions, including the NASDAQ, NYSE, and London Stock Exchange.

For Indian market regulators, this is a first. While Indian firms could issue debt securities on international exchanges, known as masala bonds, the same option was not available for equity shares.

The value of an ADR should exactly match the value of the underlying stock. Arbitrage traders profit from small price differences between exchanges.

The National Stock Exchange of India (NSE) was founded in 1992 and began trading in 1994, as opposed to the Bombay Stock Exchange (BSE), which has been in operation since 1875. Both exchanges use the same trading mechanism, trading hours, and settlement process.

It gives you a capital resource of at least three crores for each of the past three years with a bare minimum of 12 months, but it does not give you more than 50% of the net tangible asset, as it is held in the monetary asset. Moreover, if it has more than half of the net tangible assets on hold as a monetary asset, and if more than half of the net tangible assets are held in monetary assets, the issuer has made firm commitments to use the surplus cash reserves in the business or project; and it has a track history of profits in line with Clause 205 of the Companies Act, 1956, for at least three of the previous five years.

However, if the extraordinary items are not being considered by calculating the distributable profits, it will have a net value of at least one crore INR in each of the preceding three whole years of twelve months each. The average overall of the suggested issue and the previous technical assessment in the given financial year in aspects of this authorised capital will not surpass five times with its pre-use net worth as per the given audited balance sheet of the coming financial year. 

Clause 97 of Chapter X also specifies additional requirements for a foreign company intending to issue IDRs.

 An issuing company that issues IDRs must also meet the following requirements:

• In its home country, the issuing company is publicly traded.
• No regulatory body prohibits the issuing company from issuing securities.
• In its home country, the issuing company has a track record of adhering to equities market regulations.

Conclusion

Commercial banks all over the world make foreign currency loans available for business purposes.

They are a significant source of funding for international non-trade operations. Banks provide different types of loans and services depending on the country. For example, Standard Chartered has emerged as a major source of foreign currency loans for the Indian industry.