ADR vs GDR
ADR deals with US stock market while GDR deals with international stock market where US stock market is excluded. ADR allows foreigners to trade in US whereas GDR allows foreigners to trade all over the world.
Since the inception of civilization, humans are involved in selling and purchasing goods. And they have been practicing this not only at the regional level but also at the global level as well.
During the time of Harappan civilization people of Mohenjodaro used to trade with Mesopotamian civilization.
And we are talking about the time when money or currencies were not in practice. They used to follow the barter system.
So with the growth of trade, the production of goods also cultivated over a while. Companies came into existence. Then these companies started taking investments from local people.
With time many things have happened during which the Industrial Revolution also took place. People started trading with much more intensity. But with this, the need for funds also started rising.
What is Depository Receipt
And with this, Depository Receipt comes into play. Although there are many ways of raising funds like listing shares in the stock market, fundraising campaigns, or by selling shares.
But if there is still a shortfall of funds then companies ask the global investors to invest in their project. And this is called depository receipt (DR).
So basically Depository receipt is a negotiable instrument in which an investor of the foreign country buys shares of a local company in the local currency listed in the local market and gets a receipt is known as depository receipt.
This gives a sense of security to the foreign investor about his funds.
For example, if an American company wants to raise fund through foreign investment then it may have to follow the following procedure
- The company, first of all, will contact the domestic custodian that will hold the company shares.
- All the paperwork will be done by this domestic custodian.
- And the same type of domestic custodian will also be present in the investor’s country.
- This domestic custodian of investor’s country is known as “Overseas Depository Bank”.
- After holding or doing paperwork of the company, the domestic custodian will update or inform the overseas depository bank about the shares.
- Now the overseas depository bank must inform the investor about the share and its authenticity.
- It also updates the foreign investor that they are the one who is dealing with the whole process.
- And the Acknowledgement overseas depository bank gives to the overseas or foreign investor is known as ADR or GDR. It depends upon where one is investing.
Also, an overseas investor can sell the depository receipts which are listed upon overseas stock exchange.
Examples of the overseas stock exchange are NYSE, Nasdaq, etc.
Comparison Table Between ADR and GDR (in Tabular Form)
|Parameter of Comparison||ADR||GDR|
|Access||Companies listed in NYSE||Companies listed in LSE and Euronext(France)|
|Market||Retail Investor Market||Institutional Market|
|Liability||Legally more complicated||Less as compare to ADR|
What is ADR?
NYSE (New York Stock Exchange), Nasdaq, America Stock Exchange, Chicago Stock Exchange, are some of the stock exchanges that are active in the USA and have various companies listed.
Some of the major global giants like Amazon, Facebook, Apple, General Motors, etc have been listed in these stock exchanges.
Investors from all around the world express their interest in investing in these companies and the return is much higher than any other company in the world.
Keeping in mind and to safeguard the interest of local investors, the government has made the process very complicated through legal bounds and has also made very costly
Still, if an American company wants foreign investment then the company will release ADR for foreign investors via the bank and fulfill the requirement.
What is GDR?
Many global giants are listed on Americas’ stock exchange but not all.
There are many other famous companies that are not present in America but have very large market capitalization. And from time to time they also need funds to meet the requirement.
So for them, GDR is available. GDR stands for Global Depository Receipt. As the name itself bear the word Global which means the whole world.
So it is the depository receipt issued by every other country except America.
Main Differences Between ADR and GDR
ADR ( American Depository Receipt)
If any investor who is not an American citizen and wants to invest in USA company through its shares listed in New York Stock Exchange (NYSE) and in US dollars, will receiver ADR from the American bank.
GDR (Global Depository Receipt)
If an investor invests in UK LSE (London Stock Exchange) shares of UK Company in Euro gets a receipt of GDR.
Frequently Asked Questions (FAQ) About ADR and GDR
- What is the risk of trading in ADR and GDR?
ADR (American Depository Receipt) and GDR (Global Depository Receipt) are used by Indian companies.
They are used in order to raise funds from markets in foreign countries. Risk of trading in ADR and GDR are mainly of three types:
1) The first one is the exchange rate risk. Exchange rates for currencies in global markets are always in flux. There is a risk that the exchange rate of the issuing company may dropdown.
2) The second risk is political risk. A change in the political party or regime of the issuing company may end up undermining the exchange rate or destabilizing the company.
3) Inflation risk is the third risk of trading in ADR and GDR. The inflation rate in the issuing company may destroy the value of that currency.
- What are the 3 types of ADR?
ADR stands for Alternate Dispute Resolution. People resort to this method to solve their disputes because it is less expensive and faster as compared to a trial.
It lets people decide when and how their disputes will be resolved.
Three main types of ADR are:
Facilitation – It is a less formal type of ADR. An unbiased third person works from both sides to resolve the dispute. All the negotiations are done with emails, phone or through written correspondence.
Mediation – It is a more formal type. A mediator helps both parties to settle the dispute by offering various options. Both sides tell their stories and mediator helps them find a solution that is in the benefit of both parties.
Arbitration – It is the most formal type of ADR. There is no discussion or facilitation between both parties. An arbitrator checks the evidence and listens to the stories to take a final decision. Arbitration could be binding or non-binding in legal nature.
- Which form of ADR is most effective?
Mediation is most effective among all the ADR types. It provides an option to both parties and none of the parties has to suffer a major loss. Something is better than nothing and that’s why people prefer this ADR method.
- Why is ADR needed?
ADR is needed to resolve disputes among individuals, communities, companies, and families.
It is needed to save the court’s time in solving disputes that can be solved with the right communication and discussion.
A neutral third person listens to the problems of both parties and reaches a verdict.
It helps in maintaining the peace between families, communities and individuals and provides better options to both parties.
- Is ADR legally binding?
ADR can be legally binding if both parties wish the same. Legally binding means that the decision of the third person will be the final and both parties have to accept it anyhow.
Most parties prefer non-binding method so they can ask for a trial if they do not agree with the third person.
Though Depository Receipts (DR) is a very convenient way of raising funds when all the options run out or when the foreign investor is someone whose currency value is bigger than the one who needs funds.
The most common problem is that depository receipts are not listed on every stock exchange. This makes it very difficult for some of the investors.
Despite that, the practice of buying and selling takes place on a large scale but through institutional investors.
Whether we talk about ADR or GDR both have equal importance and are a very efficient method of getting funds from abroad.
At these times of globalization, the world is shrinking and with technology, we are entering the new world where borders will remain for namesake.
Markets are growing and so do the demands. To meet these demands, funds will be always required.
Moreover, in an era of digital currency, transferring funds is the easiest task. Every person wants to invest his/her money. ADR and GDR have a major role to play.
Word Cloud for Difference Between ADR and GDR
The following is a collection of the most used terms in this article on ADR and GDR. This should help in recalling related terms as used in this article at a later stage for you.