American Depository Receipts And Global Depository Receipts Finance Essay

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Trade and commerce has been an important aspect of globalization. Since the 19th century, when the colonial era was at its peak, foreign markets were the reason for colonial wars since the importance of foreign markets were realized. However, towards the end of the colonial era, when newly independent countries began to build their economies from scratch they started clamping down on foreign investment and only decades later, slowly began to open up their markets after centuries of exploitation. Corporate entities, in order to ensure larger capital started looking for foreign investors. For an investor, investing in a foreign corporation would mean unnecessary hassle since it would include going through a lot of technical procedures. In order to solve the problems of both the investors and corporations seeking foreign investment, the concepts of American depository receipts and global depository receipts were introduced. Introduced to the financial markets in 1927, an American Depository Receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage. [1] The ADR price is set to suit the American market, where the face value of share prices is typically higher – perhaps $20-100 or more. At these levels, each ADR usually represents several foreign shares, rather than just one. [2] In order to ensure that investors from different countries and not one country alone may invest in a corporate entity, it was essential to make available such stocks on an international level. A Global depository receipt (GDR) is when [a] bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international branch. The shares trade as domestic shares, but are offered for sale globally through the various bank branches [3] . Indian companies are permitted to raise equity capital in the international market through the issue of Global Depository Receipt. GDRs are designated in dollars and are not subject to any upper limit on investment. [4] Such machinery came to be used in India much later and was introduced first in the 1990s. This system was brought about by the liberalization process of the economy which started during that time. The use of ADRs and GDRs has steadily gained popularity in India with corporations looking towards global markets and attracting foreign investments. Numerous Indian software companies have taken advantage of these schemes [5] and a multitude of other schemes specifically related to information technology companies have been brought about to encourage the issuance of ADRs and GDRs by such companies. In just a few decades, India will be one of the largest economies in the world. To reach that point, companies in India will have to invest colossal sums in developing their businesses.

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