American Depositary Receipt

An ADR programme begins when a broker buys ordinary shares in the issuer's home market and delivers them to a local custodian bank. The custodian confirms the deposit to the US depositary bank, which then issues receipts against those shares. Each receipt represents a fixed ratio of underlying shares, which may be several ordinaries per receipt or a fraction of one, chosen so the dollar price lands in a range familiar to US investors.

The theoretical value of a receipt is the home-market share price multiplied by the number of shares per receipt, converted at the spot exchange rate. Because receipts can be cancelled as easily as created, arbitrageurs enforce that relationship: if the receipt trades rich, they buy shares abroad and deposit them; if it trades cheap, they buy receipts, surrender them to the depositary and sell the released shares locally. Transaction costs, custody fees and any capital controls determine how wide the gap can persist.

Depositary receipt programmes differ in how far the foreign issuer engages with US regulation. The lightest sponsored structure trades over the counter with minimal registration and raises no new capital; it is essentially a distribution channel for existing shares. A listed programme requires registration with the securities regulator and periodic reporting on the foreign private issuer form, which brings exchange listing and much deeper US institutional participation. The most demanding structure combines listing with a public offering, so the issuer actually raises dollars from US investors.

A separate route places restricted receipts privately with qualified institutional buyers, avoiding full registration but limiting the investor base and secondary liquidity. Unsponsored programmes sit outside all of this: a depositary assembles them without an agreement with the issuer, so several competing programmes on one company can coexist and none will list on an exchange.

The depositary collects dividends in the issuer's currency, applies any withholding tax imposed by the home jurisdiction, converts the balance to dollars at prevailing rates and distributes the net amount to holders. It also charges pass-through servicing fees, deducted from distributions or billed separately, and administers rights issues, splits and takeovers, sometimes by selling entitlements rather than passing them through.

Voting rights are indirect: holders instruct the depositary, which votes the deposited shares, and instruction deadlines are early. Crucially, dollar quotation changes the unit of account, not the economics. The receipt's value tracks a foreign-currency asset, so home-currency depreciation reduces the dollar price mechanically. Country risk, home-market liquidity, accounting standards and the risk of a programme being terminated or delisted all remain with the holder.

Candidates should be able to place ADRs within the broader family of instruments that give access to non-domestic equity: global depositary receipts, typically issued outside the United States and the issuer's home market and often listed in London or Luxembourg; global registered shares, which are ordinary shares traded in several currencies across multiple markets without a depositary; and basket products that bundle receipts from one country or sector into a single tradable unit.

Expect to distinguish sponsored from unsponsored programmes, rank the levels by disclosure burden and capital-raising ability, and identify the parties involved: issuer, custodian, depositary and holder. You should also be able to reconcile a receipt price with the underlying share price given a ratio and an exchange rate, and to explain why dollar denomination does not neutralise currency, political or liquidity exposure.