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A depositary receipt (DR) is a tradable security issued by a depositary institution to represent shares of a foreign company that remain held by a custodian in the company’s home market. An ordinary share is the company’s underlying equity security itself. A DR can make an overseas company available through another market, currency and settlement system, but it does not make the receipt identical to the ordinary share: the conversion ratio, voting process, fees, disclosures and ability to obtain the underlying shares all depend on the particular program and its deposit agreement.
What is a depositary receipt?
A depositary receipt is a negotiable instrument representing an interest in shares of an overseas company. The company’s shares are deposited with a depositary bank or its local custodian in the issuer’s home market. The depositary then issues receipts that investors can buy and sell in another market.
The receipt is therefore a claim created by a depositary arrangement, not a second class of the company’s ordinary share. The deposited shares remain the underlying equity. J.P. Morgan’s depositary-receipts glossary distinguishes the receipt certificate from the depositary share that is actually traded, while noting that “DR” and “DS” are commonly used interchangeably in practice.
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Ordinary shares are the underlying equity
An ordinary share is issued under the company’s home-market law and is normally traded on that market in its local currency. Its terms determine the shareholder’s basic economic interest and whatever voting, dividend and other rights the issuer and local law provide.
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When a depositary program is established, those ordinary shares are placed into custody. Investors in the other market generally hold receipts rather than having their names recorded as direct holders of the local shares. The deposit agreement explains how the depositary passes through economic benefits and handles shareholder actions.
An ADR is one type of DR
An American Depositary Receipt (ADR) is a depositary receipt made available in the United States. Investor.gov explains that an ADR can represent one or more shares of a foreign company or a fraction of a share. ADRs commonly trade in U.S. dollars and clear through U.S. settlement systems, which can remove the need for a U.S. investor to place a trade directly on a foreign exchange.
“ADR” is therefore a geographic and program label, while “DR” is the broader category. Other markets use their own depositary-receipt programs and names. The practical terms always come from the specific receipt’s documents rather than from the label alone.
How the depositary arrangement works
The process has several parties: the foreign issuer, a depositary institution, a custodian in the issuer’s home market, brokers and investors. The sequence below describes the usual structure; an individual program can add its own conditions.
1. Shares are deposited
The issuer or an investor delivers the relevant ordinary shares to the depositary or to the depositary’s local custodian. The shares are held under the program’s custody arrangement in the home market. The deposit agreement sets out how many shares are required for each receipt and what happens if the program is changed or terminated.
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2. Receipts are issued
After the shares are accepted into custody, the depositary issues receipts representing the specified interest. A receipt may represent one ordinary share, several ordinary shares or only a fraction of one share. New receipts can be created when additional shares are deposited, subject to the program’s procedures.
3. Investors trade the receipts
Investors buy and sell the receipts through the market where the program is available. For an ADR, that usually means a U.S. broker, dollar quotation and U.S. clearing and settlement. The receipt’s market price reflects the value of the represented shares, the conversion ratio, exchange rates, local and foreign market conditions, and supply and demand for the receipt itself.
4. The depositary administers investor services
The depositary keeps records for the program and performs administrative tasks described in the documents. These can include collecting dividends from the custodian, converting the proceeds into the receipt-market currency, forwarding shareholder communications and collecting voting instructions. Taxes, expenses and depositary charges may be deducted before money or information reaches receipt holders.
5. A holder may request the underlying shares
Subject to the deposit agreement, a receipt holder can surrender receipts and request delivery of the represented ordinary shares. The request may require a minimum number of receipts, broker and custodian processing, taxes, fees and enough time for settlement. Some programs restrict withdrawal in particular circumstances, so the right is contractual rather than an assumption that applies on identical terms to every DR.
Why the receipt-to-share ratio matters
The ratio states how many ordinary shares are represented by one receipt, or what fraction of a share one receipt represents. Investor.gov notes that an ADR’s price corresponds to the home-market share price adjusted for this ratio. A receipt price should therefore not be compared with the ordinary-share price without first applying the ratio and the relevant exchange rate.
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Illustrative calculation
Suppose, purely as an illustration, that one receipt represents two ordinary shares. If each ordinary share trades for 50 units of the home currency and the exchange rate is 0.10 U.S. dollars per home-currency unit, the represented value is approximately 10 U.S. dollars before market spreads, fees and other adjustments: 2 × 50 × 0.10. If the ratio instead represented one-quarter of a share, the equivalent value would be one-quarter of the single-share value before those same adjustments.
The ratio can make a receipt’s quoted number look higher or lower than the local share’s quotation without indicating a different percentage ownership. Prices can still diverge temporarily because the two markets operate at different times, currencies move, and buyers and sellers value the receipt independently.
Depositary receipts and ordinary shares compared
| Dimension | Depositary receipt | Ordinary share |
|---|---|---|
| What the investor holds | A receipt representing an interest in deposited underlying shares | The issuer’s underlying equity security |
| Trading market and currency | May trade in another market; an ADR may trade in U.S. dollars through U.S. settlement systems | Usually trades in the issuer’s home market and local currency |
| Rights administration | Handled through depositary procedures and the program’s deposit agreement | Governed by the share’s terms, issuer law and home-market processes |
| Dividends and communications | Depositary and custodian collect, process and pass through payments or information under the program | Issuer or local intermediary pays and communicates under home-market procedures |
| Conversion | Surrender and withdrawal follow the deposit agreement and operational requirements | No depositary conversion step is required to hold the share |
| Fees | Depositary and transaction charges may apply, including charges connected with dividends, currency exchange or voting | Direct-market commissions, taxes and local-market charges may apply |
These are structural distinctions, not guarantees about every security. A particular ordinary share may be available through several markets, and a particular DR may have unusual restrictions. Read the program documents for the security being considered.
What rights does a receipt holder have?
Receipt holders generally receive an economic interest linked to the deposited shares, but the route to each right is different from direct share ownership. The depositary receives dividends, corporate notices and other materials from the custodian, then applies the program’s procedures. A holder may need to meet a deadline, pay a service charge or give an instruction through a broker to participate.
Voting
Voting instructions are normally collected by the depositary and transmitted under the deposit agreement. The agreement may specify record dates, cut-off times, how instructions are counted and what happens when holders do not respond. Do not assume that a receipt holder can vote in exactly the same way, at the same cost or within the same time window as a holder registered directly on the home-market share register.
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Dividends and corporate actions
When the issuer declares a dividend, the custodian receives the local-currency payment. The depositary may convert it, deduct taxes and program expenses, and distribute the balance. Stock splits, rights offerings, tender offers and other corporate actions likewise follow the deposit agreement. Some actions may be difficult or impossible for receipt holders to join if the required markets, forms or deadlines are unavailable.
Sponsored and unsponsored programs
The U.S. Securities and Exchange Commission (SEC) describes a sponsored program as one created through a direct issuer–depositary agreement. That arrangement generally covers recordkeeping, shareholder communications, dividend payments and other services. An unsponsored program can be established without the foreign issuer’s cooperation. The issuer’s participation, the information supplied and the available services can therefore differ. Check the specific registration statement and deposit documents rather than inferring rights from the word “ADR.”
ADR program levels and what the labels mean
An SEC investor bulletin published on August 17, 2012, described three broad ADR levels:
- Level 1: an over-the-counter trading presence.
- Level 2: an exchange-listed trading presence, but not a capital-raising program.
- Level 3: a trading presence that may also raise capital for the foreign issuer.
Those descriptions explain the historical framework in that bulletin. They are not a substitute for checking current U.S. securities rules, the receipt’s current filings or the terms of a particular program. A level label does not by itself tell you the fee schedule, voting mechanics, disclosure quality or withdrawal conditions.
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A depositary bank may charge custody or depositary-service fees. Additional charges can be connected with dividend processing, currency conversion, voting, corporate actions, issuance or cancellation of receipts, and delivery of the underlying shares. Your broker may also charge its own commission, foreign-exchange spread or transaction fee. The amount and timing are program-specific, so a historical example from another ADR is not a reliable current price.
Before trading, ask the broker which charges it passes through and read the receipt’s fee schedule. The SEC specifically advises investors to review the registration statement and deposit documents and to ask the broker what fees apply. Look for whether a fee is taken from a dividend, charged when a receipt is held, or triggered only by an action such as conversion.
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Risks that remain after the convenience
Foreign-company disclosure
A receipt does not turn a foreign issuer into a domestic issuer. Non-U.S. companies can have disclosure obligations that differ from those of U.S. public companies. Apart from annual-report requirements described in the SEC bulletin, information may follow home-country rules and may not be as extensive or directly comparable to U.S. reporting. Check which reports are available, the accounting framework used and how promptly material events are disclosed.
Currency exposure
A dollar-traded ADR can simplify the order and settlement process, but it does not remove currency risk. The issuer’s revenues, costs, assets and ordinary shares remain linked to the home market and its currency. Exchange-rate changes can affect the receipt’s dollar value and the dollar amount of a dividend even when the local share price is unchanged.
Country and market conditions
Political, economic and social conditions in the issuer’s country can affect its results, access to capital, ability to pay dividends and share price. Trading hours, holidays, capital controls, market closures and different settlement practices can also make prices and liquidity behave differently from those of the receipt.
Intermediary and legal protections
Investor.gov states that ADRs can be purchased through a U.S. broker. Its international-investing guidance warns that an investor who deals directly with a foreign broker that is not registered with the SEC may not receive the same protections available through an SEC-registered broker and might need to rely on legal remedies in the company’s home country. Using a receipt through a regulated intermediary does not eliminate investment risk, but it can change the regulatory and dispute-resolution framework that applies to the transaction.
What to check before buying a DR
- Identify the exact security. Confirm the receipt’s ticker, market, depositary institution and whether the program is sponsored or unsponsored.
- Read the ratio. Find the number or fraction of ordinary shares represented by one receipt and use it when comparing prices.
- Review the deposit agreement. Check withdrawal, cancellation, issuance, voting, corporate-action and termination procedures, including deadlines and minimum amounts.
- Find the fee schedule. Ask the broker about depositary, custody, dividend, currency-conversion, voting, transaction and withdrawal charges.
- Evaluate the issuer’s information. Read the available annual reports and other disclosures, noting the home-country reporting rules and any gaps in comparability.
- Consider currency and country exposure. Assess how exchange rates and political, economic or social conditions could affect the company and the receipt.
- Confirm broker protections and settlement. Understand which broker is executing and holding the position, what investor protections apply and how settlement will occur.
How many ADRs exist?
The SEC’s August 17, 2012, investor bulletin said there were more than 2,000 ADRs representing companies located in more than 70 countries. That is a dated 2012 statistic, not a current market count. Program listings, eligibility, fees and legal requirements change, so a current investor should verify the receipt’s filings and deposit agreement rather than relying on that historical figure.
The practical distinction in one sentence
An ordinary share is the foreign company’s underlying equity security; a depositary receipt is a separately issued, tradeable representation of an interest in shares held in custody. The receipt can make access and settlement easier in another market, while its ratio, rights, costs and conversion process are determined by the program that created it.
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