ADRs and GDRs mechanisms allow investors to access foreign stocks through their own domestic markets. This helps to simplifies international investment and, significantly, gives access to very helpful portfolio diversification.
Both ADRs and GDRs are types of depositary receipts in which a depositary bank acts as an intermediary between investors and the issuing foreign company, managing the processes of issuing, administering, and trading those shares in foreign markets.
The setup provides benefits to investors in terms of availing shares of foreign companies without necessarily trading on foreign stock exchanges or in complicated foreign regulations.
An ADR allows an American investor to buy shares in a foreign company directly on the U.S. stock exchanges, NYSE or Nasdaq, for example. An overseas company can arrange an ADR through a U.S. bank issuing the shares in U.S. dollars, which makes it easier for Americans to invest without even dealing with foreign currency.
Yet, the currency risks are always there because the dividends are paid from the home currency of the company and hence taken to dollars, so values are bound to swing both ways.
GDR
The global depositary receipts are somewhat similar, but these are issued to several international markets; this way, companies can raise funds in a number of countries simultaneously. With GDRs, a company can issue shares on markets like London and the U.S. with a central bank managing the transactions. This way, companies can reach a wider range of global investors and can comply with each country’s legal and financial rules.
ADRs and GDRs enable cross-border investment because they provide access for investors to a foreign company. ADRs target U.S. investors, while GDRs are targeted at international investors. This enhances the probability of a company raising money anywhere in the world. However, both carry certain risks; for example, fluctuations in currency and changes in different markets’ laws and regulations, but it leads to crossing borders to provide avenues for investment.
Difference between ADR & GDR
Issuing Bank and Trading Markets:
The issuing authority of ADRs and GDRs reflects their primary markets. U.S. depositary banks issue ADRs, whereas these are available only on U.S. stock exchanges. This simply means that they are regulated by U.S. financial authorities and strictly adhere to U.S. securities laws. On the other hand, GDRs are issued by international banks and can be traded in several countries according to the issuing bank’s network and target markets. The flexibility makes GDRs more suitable for companies that wish to raise capital from regions out of the United States, particularly in Europe and Asia.
Target Investor Base:
The ADR investor base is primarily American because ADRs are structured and regulated to comply with the US market preferences and standards. The GDRs focus on a more global investor base. These also offer shares, which investors from other countries can acquire. These target people who are either individuals or even companies that may want to seek diversification across international markets without geographical limitation.
Regulatory Compliance:
The ADRs and GDRs operate according to their required regulatory standards as per their trading locations. ADRs have to adhere to the laws in the United States, beginning from the U.S. Securities and Exchange Commission rules and further down to the regulations of specific exchanges.
This leaves a simplified investment process for U.S. investors when investing in such securities. Whereas, GDRs have to adhere to each country’s regulation in which it is traded. This makes it more inconvenient issuing GDRs due to the legal as well as financial standards required for disclosure among jurisdictions.
Availability and Investment Flexibility:
ADRs are issued only in the U.S. Thus, they are available only for American investors and hence restricted in their application outside the U.S. GDRs are issued in several countries and hence are more flexible in their international investment. Businesses that look for a global presence will like GDRs since it provides them with an opportunity to raise funds from investors all over the world.
