International depository receipts (IDRs), also known as Global depository receipts (GDRs), are receipts issued by banks as evidence of ownership of one or more shares of the underlying stock of a foreign company that the bank holds in trust.
The American version of international depository receipts are called American Depository Receipts (ADRs). IDRs are called Global Depository Receipts in Europe, and are traded on the London, Frankfurt and Luxembourg exchanges.
These securities allow investors to have access to capital markets that are not in their home country. They are issued by various international banks, including Citigroup, The Bank of New York Mellon, JPMorgan Chase, and Deutsche Bank.
International depository receipts represent ownership in shares of a foreign company. Investors from developed markets use IDRs to invest in companies in foreign markets that show signs of profitability and future growth.
Global depositary receipt prices are based on the values of related shares. However, they are traded and settled separately from the underlying share. Any ratio can be used, for example 1 GDR can be equal to 10 underlying shares.
GDRs have the following characteristics:
– they are a type of unsecured security
– interest and redemption price (price if repurchased before maturity) is public in foreign agency
– they may be converted into a number of shares
– they are listed and traded in the stock exchange
One advantage of the international depository receipts structure is that the company does not have to follow the issuing requirements of the foreign country where the stock is publicly listed. They also provide the investor less risk from not being exposed to foreign exchange fluctuations and any applicable tariffs that would have to be paid if they had simply bought the foreign stock.
IDRs exist because many foreign corporations do not want to bother with the expense and cumbersome procedures involved in order to get their shares listed on the stock exchanges of other countries.
This is how IDRs work:
A broker will purchase shares at foreign stock exchanges and deliver them to a custodian bank. Another bank, called a depositary bank, issues shares (receipts) on the basis of the shares held by the custodian bank. Those receipts can be sold and bought on the local exchange or over the counter just like any other domestic stock.
The prices are quoted in local currency, and dividends are paid in local currency. And the buying/selling and settlement process is the same as with shares that are directly listed on local exchanges.
Video – What are American Depository Receipts