Understanding American Depositary Receipts: A Comprehensive Guide for Investors

Global Investing Simplified: American Depositary Receipts (ADRs) as a Gateway to International Markets

American Depositary Receipts (ADRs) have become an increasingly popular investment tool for global investors seeking exposure to international companies through US stock exchanges. ADRs enable investors to buy shares of foreign companies in US dollars without the need to open overseas trading accounts or transact directly on foreign exchanges. This convenience has made ADRs an attractive option for investors looking to diversify their portfolios.

The concept of ADRs is exemplified by Infosys, which is listed on the National Stock Exchange (NSE) under the ticker INFY and also trades as an ADR on the New York Stock Exchange (NYSE). This dual listing allows US investors to invest in Infosys through their domestic markets while providing the company with access to a wider global investor base.

However, the relevance of ADRs for Indian investors has evolved over time. According to Mohit Gulati, CIO and Managing Partner at ITI Growth Opportunities Fund, ADRs were once an attractive avenue for Indian investors seeking dollar-denominated exposure to global companies that were otherwise difficult to access. However, with the availability of international mutual funds, direct overseas investing under the Liberalised Remittance Scheme (LRS), and India-listed exchange-traded funds (ETFs) tracking global markets, the structural advantage that ADRs once offered has diminished.

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Today, ADRs serve a more specialized purpose, particularly for investors tracking price differences between dual-listed stocks or those with specific tax, estate-planning, or dollar-asset-allocation requirements. For most retail and institutional investors looking for broad international exposure, newer investment routes have largely replaced ADRs as the preferred option.

How ADRs Work

ADRs are negotiable instruments provided by a US financial institution that represent ownership in a foreign company's shares. The usual procedure unfolds as follows:

• A foreign business collaborates with a US depositary bank.
• The bank acquires or maintains shares of the foreign company in its domestic market.
• In exchange for these shares, the bank issues ADRs that trade on US stock markets such as the NYSE or Nasdaq.
• Investors can buy and sell these ADRs similarly to any other stock listed in the US.
• Holders of ADRs typically enjoy benefits such as dividends, stock splits, and other corporate actions.

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Indian Companies Listed on US Exchanges

ADRs of several Indian companies are listed on US exchanges, including:

Why ADRs Matter for Indian Investors

ADRs are beneficial not only for US investors but also for residents of India, who can invest in ADRs via international investment platforms to access both Indian and foreign companies listed in the US. Indian investors can purchase ADRs of companies such as HDFC Bank, ICICI Bank, Infosys, and MakeMyTrip, as well as global brands like Alibaba. A significant benefit is the potential to benefit from the company's growth alongside any appreciation of the US dollar against the Indian rupee.

Key Benefits of ADRs

• Effortless global diversification: ADRs allow investors to engage with top firms across various regions and industries without needing to navigate foreign stock markets.
• Dollar-denominated investments: Investments are conducted in US dollars, providing investors with exposure to currency fluctuations in addition to stock performance.
• Income from dividends: Numerous ADRs distribute dividends in US dollars to investors.
• More manageable regulatory environment: Investors can access international companies via US markets without the hassle of navigating multiple foreign regulatory frameworks.
• Access to rapidly growing companies: ADRs give investors the opportunity to invest in widely recognised global brands in sectors including technology, healthcare, consumer products, and manufacturing.