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Global investing has become more accessible for Indian investors, with many looking to invest in well-known international companies. One way to gain exposure to foreign businesses without buying shares directly on overseas exchanges is through American Depositary Receipts (ADRs).
In this article, we will learn what American Depositary Receipts (ADRs) are, how they work, their types, pricing, taxation, advantages, risks, and how they differ from Global Depositary Receipts (GDRs). We will also understand what Indian investors should know before investing in ADRs.
Key Takeaways
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ADRs allow investors to invest in shares of foreign companies through US stock exchanges.
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ADRs can be sponsored or unsponsored and are classified into 3 levels.
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They help investors diversify internationally but also involve currency and tax considerations.
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Indian investors can invest in ADRs through international investment platforms permitted under RBI regulations.
What is an American Depositary Receipt (ADR)?
An American Depositary Receipt (ADR) is a negotiable certificate issued by a US depositary bank that represents shares of a foreign company. Instead of buying shares directly on a foreign stock exchange, investors purchase ADRs, which trade on US exchanges such as the NYSE or Nasdaq in US dollars.
Each ADR represents 1 share, multiple shares, or even a fraction of a share of the foreign company. Investors receive dividends in US dollars after applicable taxes and fees.
For foreign companies, ADRs provide an opportunity to access US investors and raise capital without directly listing their shares in the United States.
How Does an ADR Work?
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A foreign company's shares are purchased and held by a US depositary bank or its overseas custodian.
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The bank issues ADRs backed by those shares.
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These ADRs are listed on US stock exchanges or traded over the counter.
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Investors buy and sell ADRs through their brokerage accounts just like any other listed stock.
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Dividends are paid in US dollars after deducting applicable taxes and fees.
This structure removes the need for investors to deal with foreign exchanges, local settlement systems, or currency conversion while purchasing shares.
Types of ADRs
|
Feature |
Sponsored ADR |
Unsponsored ADR |
|
Meaning |
Issued by a US depositary bank in partnership with the foreign company. |
Issued by a US depositary bank without the foreign company's participation or approval. |
|
Company Involvement |
The foreign company actively participates in the ADR programme and works with the depositary bank. |
The foreign company does not participate in or manage the ADR programme. |
|
Issuer |
Only one depositary bank is authorised to issue the ADR. |
Multiple US banks may issue ADRs for the same foreign company. |
|
Trading Venue |
Usually listed and traded on major US stock exchanges, subject to the ADR level. |
Generally traded in the over-the-counter (OTC) market. |
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Regulatory Compliance |
The foreign company complies with applicable SEC reporting and disclosure requirements, depending on the ADR level. |
Limited regulatory requirements, as the company is not directly involved. |
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Voting Rights |
Investors receive voting rights, depending on the ADR programme. |
Investors generally do not receive voting rights. |
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Dividend Payments |
Dividends are distributed through the depositary bank after applicable taxes and fees. |
Dividends, if any, are also distributed by the issuing bank, subject to applicable deductions. |
Read more: Indian Depository Receipt
Levels of ADRs
Sponsored ADRs are divided into 3 levels based on SEC reporting requirements and market access.
1. Level I ADR
This is the simplest ADR programme.
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Trades only in the OTC market
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Lowest regulatory requirements
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Cannot be used to raise capital
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Suitable for companies testing investor interest
2. Level II ADR
Level II ADRs have stricter reporting requirements.
Features include:
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Listed on US stock exchanges
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Greater visibility among investors
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Cannot raise fresh capital
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Requires compliance with SEC reporting standards
3. Level III ADR
This is the highest level of ADR.
Companies issuing Level III ADRs can:
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Raise capital from US investors
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Launch public offerings in the US
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Trade on major US exchanges
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Meet the highest SEC reporting and disclosure standards
How are ADR Prices Determined?
The price of an ADR depends primarily on the value of the company's shares in its home market.
A depositary bank decides how many local shares each ADR represents. For example, one ADR may equal:
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One share
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Half a share
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Two shares
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Multiple shares
Although ADRs trade in US dollars, their prices move largely in line with the underlying foreign shares after adjusting for exchange rates and the ADR conversion ratio.
Read More: Global Depository Receipts (GDR)
Fees Associated with ADRs
Unlike domestic shares, ADRs involve additional charges.
These include:
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Depositary or custody fees
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Brokerage charges
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Currency conversion costs
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Administrative fees
Depositary fees are often deducted from dividend payments or charged through the investor's brokerage account.
Capital Gains Tax on ADRs
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Short-term capital gains (holding period of less than 24 months): Taxed as per your applicable income tax slab.
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Long-term capital gains (holding period of 24 months or more): Taxed at 12.5% (plus applicable surcharge and cess) without indexation benefits.
Reporting Requirements
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Indian residents must disclose ADR investments in Schedule Foreign Assets (FA) of their Income Tax Return (ITR).
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Income earned from ADRs should be reported in Schedule Foreign Source Income (FSI).
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Any Foreign Tax Credit claimed must be reported through Form 67.
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Maintaining proper records and accurately reporting foreign investments helps ensure compliance with Indian tax regulations.
Things to Keep in Mind When Investing in ADRs
Despite their benefits, ADRs also carry certain risks.
1. Currency Risk
Even though ADRs trade in US dollars, the value of the underlying shares depends on the home country's currency. Exchange rate movements can affect returns.
2. Political and Economic Risk
Changes in regulations, economic conditions, or political events in the company's home country can impact share prices.
3. Additional Fees
Depositary charges and currency conversion costs can reduce overall returns.
Can Indian Investors Invest in ADRs?
Yes. Indian investors can invest in ADRs through brokers or investment platforms that offer access to US markets, subject to RBI's Liberalised Remittance Scheme (LRS) and other applicable regulations.
Before investing, consider:
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Investment objectives
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Currency fluctuations
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Tax implications
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Brokerage and transaction costs
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Company fundamentals
Conclusion
American Depositary Receipts (ADRs) make international investing simpler by allowing investors to buy shares of foreign companies through US stock exchanges. They offer exposure to global businesses, portfolio diversification, and the convenience of trading in US dollars.
Disclaimer: Access to US securities is offered via IFSCA Global Access route. Angel One Limited is registered with IFSCA as a Global Access Provider. Investment in securities market is subject to market risks, read all the documents carefully before investing. Any reference to securities is indicative and not a recommendation. Angel One Limited claims no right, title or interest therein, and no endorsement or affiliation is implied. Office address: Unit No. 256, Seats 1 to 4 located on the first floor of Pragya Accelerator II, Building -15B, Block – 15, Road No- 1C, Zone-1, GIFT SEZ, GIFT City, Gandhinagar – 382050. IFSCA Broker-Dealer Registration No. CMI2026BDK1061, GAP Registration No. IFSCA/GAP/BD/2026-2027/016.
