Question

1. What is a Depository Receipt, and how are they created?

2. Why would a firm located outside the U.S. want to have a DR program?

3. What is the advantage of a DR to a U.S. investor?

Answer 1

1.

Depository receipt is the negotiable instrument that is used by the companies to procure funds from the overseas market. Examples of depository receipts are ADR (American Depository Reciepts) and GDR (Global Depository Reciepts). To create a depository receipt, the issuing company has to meet all the necessary legal and disclosure requirements of the overseas based stock exchange. Once it is done, then the issuing company transfers its shares to the brokerage house for creation of depository receipt. Now, a brokerage house appoints custodian or bank in the country of stock exchange where the depository receipts are to be issued. Finally, bank creates a packet of shares and one packet is treated as one depository receipt and issued to the stock exchange and get traded. It is now bought and sold by the investors of the overseas country and take ownership in the company in foreign country.

2.

It is a mean to generate funds from those investors who are located at the overseas market. Further, it helps the firm to get insulated from the economic fluctuations taking place in the domestic country. Besides, it adds to the credibility of the firm that its governance is recognized by the overseas stock exchanges.

3.

The advantages to the US investors  are as follows:

A. They can benefit from the economic progress and boom in the company in a foreign country.

B. In some cases, custodian banks hold the voting rights, but in other cases, receipt holders hold the voting rights.

C. Investors can earn higher capital gain.