ADR and GDR – A Simple Explanation with Real-Life Examples

ADR and GDR – A Simple Explanation with Real-Life Examples

The Basic Problem: How Can Foreign Investors Buy Indian Shares?

Imagine an Indian company has grown very fast. It has a good reputation in India, but now it wants to expand further. It needs a large amount of money, and it would like to raise some of that money from investors outside India.

For example, an Indian technology company might think:

"There are thousands of investors in the United States who may want to invest in our company. But how can they easily buy our shares?"

This is where ADR and GDR become useful.

Part 1: What is a Depository Receipt?

Before understanding ADR and GDR, let's first understand Depository Receipt (DR).

Simple Definition

A Depository Receipt is a financial instrument issued by a bank that represents shares of a company.

In Simple Words

A foreign investor gets a document that represents shares of a company located in another country.

The actual shares are kept safely with a custodian bank, while another bank issues the receipts to investors.

Simple Example

Suppose ABC Ltd. is an Indian company.

ABC wants American investors to invest in it.

Instead of asking every American investor to come to India and buy ABC's shares on an Indian stock exchange, ABC can create a structure like this:

text

ABC Ltd. shares in India

         ↓

Indian Custodian Bank

         ↓

US Depositary Bank

         ↓

        ADR

         ↓

   US Investors

The US investor can then buy and sell the ADR in the US market, just like any other US stock.

Part 2: What is ADR?

ADR stands for American Depositary Receipt

Simple Definition

An ADR represents shares of a foreign company and is issued through a bank in the United States.

For an Indian Company

text

Indian company → shares held with custodian → US bank → ADR → US investor

Why Would an Indian Company Use an ADR?

Suppose an Indian company wants to raise money from investors in America.

The company might say:

"Instead of asking American investors to deal directly with Indian shares, let us make it convenient for them to invest through the US market."

The ADR can then be traded in a US market.

Part 3: What is GDR?

GDR stands for Global Depositary Receipt

Simple Definition

A GDR is similar to an ADR, but it is designed for trading in international markets outside the US.

The Easiest Distinction

ADR	GDR
American Depositary Receipt	Global Depositary Receipt
Associated with the US market	Used in international markets outside the US
Issued through a US bank	Issued through a bank outside India
US investors can invest conveniently	International investors can invest conveniently

Part 4: Why Would a Company Issue ADR/GDR?

Situation: Company Wants to Expand Internationally

XYZ Ltd., an Indian pharmaceutical company, wants to build a new manufacturing plant.

Cost: ₹2,000 crore

The company doesn't want to depend entirely on Indian investors.

Its management thinks:

"Our business is growing internationally. We should also approach international investors."

So the company may consider raising funds through a GDR.

Benefits to the Company

• Access a larger pool of investors

• Raise foreign-currency funds

• Increase international visibility

• Potentially improve its investor base

• Support large expansion plans

Part 5: How is an ADR/GDR Issued?

Let's take a simple example.

Suppose ABC Ltd. has shares in India and wants to raise money from foreign investors.

Step-by-Step Process

Step 1 – Company decides to raise capital

ABC decides: "We need ₹500 crore for expansion."

Step 2 – Company follows required regulations

The company must comply with Indian and overseas securities regulations.

Step 3 – Shares are placed with a custodian

The underlying shares are held with a custodian in India.

Think of the custodian as the institution that holds the underlying shares safely.

Step 4 – Depositary bank issues receipts

The foreign bank issues ADRs or GDRs against those underlying shares.

For example:

1 GDR = 2 equity shares

(This ratio is only an example. The actual ratio is decided for each issue.)

Step 5 – Foreign investors buy the DRs

Investors can then purchase the ADR/GDR in the relevant overseas market.

Part 6: Important Point – ADR/GDR is NOT a Different Share

This is where students often get confused.

Suppose:

1 ADR = 2 Indian equity shares

The ADR represents an interest in those underlying shares.

Therefore:

ADR/GDR is a receipt representing underlying shares. It is not an entirely separate business ownership created out of nowhere.

The underlying shares support the DR.

Part 7: How Are ADRs/GDRs Traded?

Suppose ABC Ltd. has issued 10 lakh GDRs.

These GDRs are listed on an international exchange.

Investor A buys 1,000 GDRs.

Later, Investor A wants to sell them.

Investor B buys them.

So the GDR changes hands in the overseas market.

Simple Flow

text

Company

   ↓

Issues/places underlying shares

   ↓

Custodian

   ↓

Depositary Bank

   ↓

Issues ADR/GDR

   ↓

Foreign Stock Exchange

   ↓

Foreign Investors

The investors can trade the receipts in the relevant market.

Part 8: What Happens to the Money?

This is an important point.

When a company issues new shares through a DR programme and investors subscribe to them, the company receives funds.

The company can then use the funds for legitimate business purposes.

Example

Company raises ₹1,000 crore.

It may use the funds for:

• Building a new factory

• Buying machinery

• Repaying eligible debt

• Expansion

• Research and development

• Working capital

The exact permitted use depends on the applicable regulations.

Part 9: ADR/GDR Can Also Be Used for International Visibility

Money is not the only reason.

Imagine an Indian company becomes popular internationally.

If its securities are available through an international DR programme, foreign investors may find it easier to participate.

This can help the company develop a broader international investor base.

Part 10: Real-Life Example – Infosys

A wonderful real-life example for understanding ADR is Infosys.

The Story

Infosys was already an Indian listed company.

In March 1999, Infosys issued 20,70,000 American Depositary Shares (ADSs).

At that time, 2 ADSs = 1 Infosys equity share

The issue price was US$34 per ADS.

The ADSs were listed on the NASDAQ National Market in the US.

Let's Turn This Into a Story

Imagine it is 1999.

Infosys is an Indian technology company and wants greater access to US investors.

The management thinks:

"Our company is growing, and many potential investors are in the United States. If we make our securities available in the US market, US investors can participate more easily."

So Infosys created an American Depositary Shares programme.

At that time:

2 ADSs = 1 Infosys equity share

The ADSs were listed on NASDAQ.

An American investor could therefore invest in Infosys through the US market rather than having to directly purchase Infosys shares on an Indian stock exchange.

Infosys later transferred its US listing from NASDAQ to the New York Stock Exchange (NYSE) in 2012.

Why Is This Example So Useful?

It demonstrates the basic idea perfectly:

text

     Indian Company

     🇮🇳 Infosys

         ↓

  Underlying Indian equity shares

         ↓

   Depositary arrangement

         ↓

American Depositary Shares / ADR programme

         ↓

      US investors

This is exactly the kind of situation in which ADRs can be useful.

Part 11: Another Way to Understand – "Ticket" Example 🎟️

Think about a concert.

The actual concert is held at the stadium.

But you don't necessarily need to carry the entire stadium with you!

You carry a ticket that gives you rights to attend the concert.

Similarly:

• Underlying shares = actual asset

• Depositary Receipt = instrument representing those underlying shares

The DR makes it easier for investors in another market to participate.

(The ticket analogy is only for understanding the basic concept. A DR is actually a financial security with specific legal and economic rights.)

Part 12: Why Would Investors Buy ADR/GDR?

Imagine you are a US investor.

You believe:

"This Indian company has excellent growth prospects."

But buying shares directly in India may involve dealing with:

• Foreign-market procedures

• Currency conversion

• Different settlement systems

• Different regulations

• Different trading arrangements

Investor's Perspective

An ADR makes investment in the foreign company more convenient.

Benefits for investors:

• Easy access

• Familiar market infrastructure

• International diversification

Part 13: Why Would a Company Prefer ADR/GDR?

From the Company's Perspective

Reason	Benefit
1. Access to foreign capital	The company can approach investors outside its domestic market
2. Wider investor base	Instead of depending only on domestic investors, it can reach international investors
3. International visibility	Being available in an international market can increase the company's profile
4. Foreign currency	Depending on the structure, the company can raise funds in foreign currency

Part 14: ADR/GDR – A Simple Corporate Situation

Let's imagine KeralaTech Ltd. , an Indian IT company.

The company has a brilliant opportunity in Europe.

It needs US$100 million for acquiring a foreign company.

Two Choices

Option A: Raise all the money in India.

Option B: Approach international investors.

If the company is eligible, it could consider a GDR issue.

How It Works

1. The company issues GDRs backed by its underlying equity shares

2. International investors purchase the GDRs

3. The company receives the proceeds

4. It uses the money to finance the acquisition

Result

• Foreign investors get exposure to the Indian company

• Indian company gets access to international capital

• Company uses capital for expansion

That is the basic commercial purpose of ADR/GDR.

Part 15: ADR vs GDR – Easiest Way to Remember

For Students

ADR

A = America

ADR → American Depositary Receipt

GDR

G = Global

GDR → Global Depositary Receipt

So:

• ADR = American market

• GDR = International markets (outside the US)

Part 16: Primary vs Secondary ADR/GDR

This is another useful concept for students.

Primary Issue

The company issues new shares and raises fresh money.

Example: ABC Ltd. issues new equity shares represented by GDRs.

• Money goes to the company

• Company gets fresh capital

Secondary / Sponsored Transaction

Existing shareholders' shares are used to create the depositary receipts.

• The proceeds go to the selling shareholders

• Not fresh capital for the company

Infosys Example: After its 1999 ADS issue, Infosys completed secondary-sponsored ADR issues in 2003, 2005, and 2006.

Part 17: The Entire Concept in One Diagram

text

                    INDIAN COMPANY

                         │

                         │ Equity Shares

                         ↓

                INDIAN CUSTODIAN

                         │

                         ↓

                FOREIGN DEPOSITARY

                     BANK

                         │

              ┌──────────┴──────────┐

              ↓                 ↓

             ADR                   GDR

              │                     │

       US Investors          International Investors

              │                     │

              ↓                     ↓

         US Market          Overseas Market

Part 18: Final Summary

What Are ADR and GDR?

ADR and GDR are methods through which investors in international markets can obtain exposure to shares of a company in another country.

Quick Comparison

Feature	ADR	GDR
Full Form	American Depositary Receipt	Global Depositary Receipt
Market	Used for access to the US market	Used to access international markets outside the US
Issued by	US bank	Bank outside India

Why Companies Use Them

• To raise capital internationally

• To reach foreign investors

• To increase their international investor base

• To improve visibility

• To facilitate international investment

Real-Life Example

Infosys

Detail	Information
Issued ADSs in	March 1999
Number of ADSs	20.70 lakh
Represented	10.35 lakh equity shares (2 ADSs = 1 share)
Issue price	US$34 per ADS
Listed on	NASDAQ
Later moved to	NYSE in 2012

The One Story to Remember

"Infosys was an Indian company, but it wanted US investors to participate more easily. In 1999, it issued ADSs under an ADR programme and listed them on NASDAQ. This gave US investors a convenient way to invest in Infosys through the US market."

That one story makes the basic purpose of ADR much easier to remember!

Note: The exact issuance route, eligibility, disclosures, pricing, listing, and use of proceeds for an Indian company's ADR/GDR issue depend on the regulations applicable at the time. The RBI's framework specifically recognises ADRs and GDRs as depositary receipts backed by underlying securities.