In this article, we will discuss about two major terms of stock exchange ADR vs GDR and the difference between both of them.
However, first of all, we have to define these terms and how it works in the Indian market. Therefore, let us take a look:
ADR is an abbreviation of American Depository Receipt. It is a negotiable certificate, known as Shares, is listed in US stock exchange. These shares are owned and issued by a U.S. bank. Through this instrument, a large numbers of U.S. companies have listed their shares in U.S. Stock exchange. These instruments are issued for Americans and others (who are living in outside the territory of America). They issue their shares in mostly three stock exchanges, i.e. NYSE, Nasdaq, AMEX). By this instrument, other country’s investors also participate in the trading of American stock exchanges.
In India, investors can purchase ADRs by brokers and dealers, who are dealing outside the territory of india. These brokers or dealers purchase ADRs for their clients from U.S. stock exchange.
These brokers have provided this facility in two ways. First, they can buy already issued ADRs and second they can create new ADRs.
The brokers/dealers purchase shares by their country stock exchange and deposit into bank in that market. The Bank issues shares in form of ADRs, which represent shares which is bought by broker or dealer itself and then apply them to client’s account.
This process is also followed by indian investors and they invest in American foreign exchanges by this instrument.
GDR is an abbreviation of Global Depository Receipt. This is a negotiable instrument which is used by various investors in any listed country in the world. Investors buy these instruments in the form of shares by any branch of international bank, which is established in their country. They allow investors to invest in any other country’s stock markets without losing their trading flexibility or income. It is also known as International Depository Receipt (IDR) and European Depository Receipt (EDR).
Well, after briefly discussing about both major terms, let us explain the difference between both of them. Let us take a look:
1. The shares, which fall under the American Depository Receipt, are listed only in American stock exchange, i.e. NYSE, AMEX, Nasdaq. However, the shares, which fall under the Global Depository Receipt, trade in any foreign exchange, where the company is established.
2. The foreign companies, which fall under GDR, are compulsory to access the stock market for dealing in stock. However in case of any foreign company, which comes under the ADR, is required to access only in American stock market.
3. Indian companies may prefer Global Depository Receipt (GDR), instead of American Depository receipt (ADR), for getting foreign investment in a wider scale for their own projects.
4. ADR Is a negotiable instrument but it negotiates only in America. On the other hand, GDR negotiates all over the world.
5. ADR and GDR are two different ways to sell their shares in foreign exchange. Therefore, we can say as GDR is a substitute of ADR, which means that, GDR can be used in place of ADR but ADR is not a substitute of GDR.
6. American investors mostly use regular equity trading account for buying ADR’s not for buying GDR’s.
7. The Indian companies, which are listed in foreign stock exchange by foreign banks GDR, such as Bajaj Auto, ITC, Ranbaxy Laboratories, L&T, Hindalco, SBI, etc. On the other hand, some examples of Indian companies, listed in American stock exchange by ADR are- Tata Motors, Patni Computers and others.
8. Examples of Foreign stock exchange, where we can buy GDRs, are London Stock Exchange and Luxembourg Stock Exchange. On the other hand, examples of foreign stock exchange, where american investors can buy ADRs are NASDAQ (National Association of Securities Dealers Automated Quotation) and NYSE (New york stock exchange).