- Depository Receipts (DRs) are financial instruments that enable investors to hold shares of foreign companies (e.g., Sony) and trade them on their local stock exchanges (INDIA—BSE/NSE).
- They provide a convenient way for investors to access international markets without purchasing shares directly on foreign exchanges, which may involve complexities such as currency conversion, foreign trading regulations, and settlement procedures.
Some of the types of depository receipts:
American Depositary Receipts (ADRs):
- S. depositary banks issue ADRs and represent shares of non-U.S. companies. These receipts are denominated in U.S. dollars and traded on American stock exchanges like regular stocks.
- ADRs are subject to the U.S. Securities and Exchange Commission (SEC) regulatory framework.
Global Depositary Receipts (GDRs):
- GDRs are similar to ADRs but are issued by international banks outside the United States. They represent shares of foreign companies and trade in markets outside the company’s home country.
- GDRs are typically denominated in a currency other than the issuer’s local currency, such as euros or British pounds. They adhere to the regulatory requirements of the countries where they are listed.
Indian Depository Receipts (IDRs)
- IDRs are financial instruments issued by Indian depository banks that represent shares of foreign companies.
- These IDRs are listed and traded on Indian stock exchanges, allowing Indian investors to invest indirectly in foreign companies without the need to trade directly on international stock exchanges.
Illustration of DR:
- Investing in Sony: Indian investors are interested in buying shares of Sony, a Japanese company, but Sony’s stock isn’t available on the Indian Stock Exchange, and buying it from the Tokyo Stock Exchange is costly and inconvenient.
- Financial Institution Involvement: To make it easier for Indian investors, a financial institution in India, like a bank, steps in. This bank buys Sony’s stock from the Tokyo Stock Exchange and holds onto it.
- Issuing IDRs:
- Instead of directly offering Sony’s shares on the Indian Stock Exchange, the bank issues Indian Depositary Receipts (IDRs) against the Sony shares it holds. These IDRs represent ownership of Sony’s shares but are traded locally in India.
- Listing IDRs:
- The bank lists these Sony IDRs on the Indian Stock Exchange, allowing Indian investors to buy and sell them just like they would with shares of an Indian company. The trading happens in the local currency, the Indian rupee, making it more accessible to local investors.
- Trading Convenience:
- Now, Indian investors can easily invest in Sony through these IDRs without dealing with the complexities and costs of international stock exchanges. They can buy and sell Sony IDRs on their local exchange, making the process simple and convenient
National Security Depository Limited (NSDL)
- NSDL is an Indian securities depository that plays a crucial role in the Indian financial market. Established in 1996, it serves as a repository for holding and maintaining electronic records of securities, including stocks, bonds, debentures, and other financial instruments.
- Shareholders: NSDL is supported by the Industrial Development Bank of India (IDBI), Unit Trust of India (UTI), and the National Stock Exchange (NSE). The major stockholders of the NSDL are Axis Bank Limited, Deutsche Bank, HSBC, Citibank, HDFC Bank, Standard Chartered Bank, Dena Bank, Oriental Bank of Commerce, State Bank of India (SBI), Canara Bank
- Regulation: NSDL operates under the regulatory framework of the SEBI, which oversees depositories and ensures compliance with securities market regulations.
Central Depository Securities Limited (CDSL)
- It is an Indian electronic securities depository founded in 1999 and based in Mumbai, Maharashtra. It is India’s second-largest securities depository and allows for account transfers.
- The State Bank of India (SBI), HDFC Bank, Bank of Baroda, Bank of India, Standard Chartered Bank, and the Bombay Stock Exchange are among the Indian banks and financial institutions promoting it.
