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 11. Discuss in detail the Concept of Depository Receipt.

A Depository Receipt (DR) is a negotiable financial instrument issued by a bank that represents shares of a foreign company. It allows investors to buy and trade foreign stocks on their domestic stock exchanges without having to deal with cross-border brokers, currency conversions, or overseas regulatory complexities. [1, 2, 3]


How Depository Receipts Work


The creation and trading of a DR rely on a well-defined network of institutions:
  1. Underlying Shares: A foreign company issues equity shares in its home country.
  2. Deposit & Custody: These shares are deposited with a local (custodian) bank in the issuing company's home jurisdiction.
  3. Issuance: The custodian bank instructs an overseas (depository) bank in the target market to issue corresponding Depository Receipts.
  4. Trading: These DRs are then listed and traded on the local stock exchange (e.g., in US Dollars or Indian Rupees) just like any other domestic stock. [4]
Primary Types of Depository Receipts


Depository Receipts are categorized based on where they are issued and traded:
  • American Depository Receipts (ADRs): Issued by US banks and traded exclusively in US markets (like the NYSE or NASDAQ). They allow US investors to easily invest in overseas companies.
  • Global Depository Receipts (GDRs): Issued by banks globally and listed on multiple international stock exchanges (often in Europe or Asia). They allow companies to raise capital across multiple international borders simultaneously.
  • Indian Depository Receipts (IDRs): Similar to ADRs but structured for the Indian market. They allow foreign companies to raise capital from Indian investors by listing on Indian exchanges like the NSE or BSE. [11, 12, 13, 14, 15]
Key Benefits
  • For Investors: DRs provide portfolio diversification by allowing access to global markets without needing a foreign brokerage account. Investors still receive rights like dividends.
  • For Companies: DRs help foreign corporations tap into overseas capital pools, increase their global brand visibility, and raise funds from international investors. [18, 19, 20]
Associated Risks


Despite their convenience, DRs carry specific risks:
  • Currency Risk: Since the receipts are traded in the domestic currency but represent shares valued in the foreign currency, exchange rate fluctuations can impact their value.
  • Economic/Political Risk: Investors remain exposed to the economic health, regulatory shifts, and political stability of the foreign country where the underlying company is based. [16]
For more detailed regulatory frameworks, you can refer to the Investopedia Guide to Depositary Receipts or the Indian Depository Receipts Scheme for regional guidelines. [23, 24]





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