Introduction to Depository Receipts
Have you ever heard of depository receipts? These financial instruments allow Indian companies to raise funds in foreign countries and provide international investors with the opportunity to invest in India. Essentially, depository receipts are issued by Indian companies listed on international stock exchanges and provide investors with receipts rather than shares themselves. The holder of a depository receipt has all the same rights and benefits as a shareholder in India, including dividends and capital appreciation (the increase in an investment’s market value).
Types of Depository Receipts
There are two main types of depository receipts: American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). ADRs are traded in US dollars and are listed on US stock exchanges, while GDRs are traded in Euros and are listed on European stock exchanges like the London Stock Exchange or the Frankfurt Stock Exchange.
How Depository Receipts Work
So how do these instruments work exactly? Well, let’s say an Indian company is looking to raise funds. They would deposit their shares with a domestic custodian within the country (in this case, India). The custodian would then provide acknowledgement of the share deposit to an overseas bank, which would issue depository receipts to investors. The price of the depository receipts is based on the price of the underlying shares. After deducting any charges and expenses for issuing the receipts, the overseas depository bank would transfer the funds to the domestic custodian, which would then pass the money on to the Indian company.
Example of Depository Receipt Issuance
Let’s use an example to illustrate this process. Say ICICI Bank is looking to raise $1,100,000 through ADRs. Assume that $1 is equal to INR 80. If one share of ICICI Bank is worth INR 880, or $11, and each ADR represents ten shares, then each ADR would be worth $110. To raise $1,100,000, ICICI Bank would need to issue 10,000 ADRs.
So there you have it – that’s how Indian companies can get listed on foreign stock exchanges with the help of depository receipts! It’s a great way for companies to expand their reach and tap into new sources of funding, while also providing investors with the opportunity to get in on the action.