An American Depository Receipt represents U.S. investor ownership of non- U.S. company shares. ADR’s are issued by U.S. depository banks and deposited with a custodian or agent of the depository bank in the country of issuance. An ADR represents the right for an investor to obtain the non-U.S. shares held by the bank. Practically the investors never receive the shares.
ADRs are priced at U.S. dollars and pay dividends in US dollars. However, convenient for investors, it results in currency risk embedded in the security. Individual shares of a non-U.S. company represented by an American Depository Receipt are called American Depository Shares (ADSs).
ADR investors can obtain ADRs by either purchasing them on a U.S. stock exchange or by purchasing the non-U.S. shares in their original market of issuance and then
a. depositing them with a bank in exchange for a new ADR or
b. swapping the shares for existing ADRs.
Investment banks are actively involved in helping non-U.S. companies list their shares in the United States in the form of ADRs. Foreign companies utilise the American Depository Receipt program to raise the capital, increase the liquidity, and expand U.S. market awareness of the company. Sometimes issuers also use ADRs as an acquisition currency.
An ADR that trades in the U.S. market is priced based on the non-U.S. company’s shares price in their home market. This price is regularly adjusted for the varying forex spot rates. Hence, there is a high degree of volatility in ADR prices. ADR prices are also affected by the home country’s accounting, legal and political differences. Although the most non-U.S. companies provide GAAP based financial information, caution is required because of the use of estimates, uncertain tax implications and other adjustments that are unique to the home country. ADRs are registered with the S.E.C. through Form-6 based on certain exemptions that are available to the qualified non-U.S. companies.