ADR (American Depositary Receipt)
How ADRs Work
- Foreign company deposits shares. The company (or an intermediary) deposits its shares with a custodian bank in its home country.
- US depositary bank issues ADRs. A US bank (e.g., JPMorgan, BNY Mellon, Citibank) creates ADR certificates backed by those deposited shares.
- ADRs trade on US exchanges. Investors buy and sell ADRs just like regular US stocks — in USD, during US market hours, through standard brokerage accounts.
- Dividends converted to USD. When the foreign company pays dividends, the depositary bank converts them from the local currency and distributes them to ADR holders (minus a conversion fee).
ADR Levels
| Level | Exchange Listing | SEC Reporting | Capital Raising | Key Details |
|---|---|---|---|---|
| Level I | OTC (over-the-counter) only | Minimal (exempt from full SEC reporting) | No | Easiest to set up; lowest visibility and liquidity |
| Level II | NYSE, NASDAQ, or AMEX | Full SEC reporting (20-F annual filings) | No | Higher visibility; must comply with US GAAP or provide reconciliation |
| Level III | NYSE, NASDAQ, or AMEX | Full SEC reporting | Yes — can raise capital via public offering | Most rigorous requirements; enables IPO-like access to US capital markets |
ADR Ratio
Each ADR can represent one, multiple, or a fraction of the underlying foreign shares. This ratio is set to place the ADR price in a range familiar to US investors (typically $10–$100). For example, if a foreign share trades at the equivalent of $5, the bank might set a 10:1 ratio — each ADR represents 10 foreign shares, so it trades near $50.
Sponsored vs. Unsponsored ADRs
| Criteria | Sponsored ADR | Unsponsored ADR |
|---|---|---|
| Initiated By | The foreign company itself | A depositary bank, without the company’s direct involvement |
| Listing Level | Can be Level I, II, or III | Level I only (OTC) |
| Number of Banks | One exclusive depositary bank | Multiple banks may issue competing programs |
| Voting Rights | Typically passed through to ADR holders | Often retained by the bank |
| Regulatory Oversight | Higher — company cooperates with SEC requirements | Lower — minimal company involvement |
Costs and Fees
- ADR fee (custody fee): Typically $0.01–$0.05 per share per year, deducted from dividends or charged directly.
- Currency conversion fee: Applied when dividends are converted from the local currency to USD.
- Foreign tax withholding: Many countries withhold tax on dividends at source (often 15–30%). US investors may claim a foreign tax credit on their US return.
Key Takeaways
- ADRs let US investors buy foreign company shares through American exchanges in US dollars.
- Three levels exist: Level I (OTC, minimal reporting), Level II (listed, full reporting), Level III (listed, can raise capital).
- Sponsored ADRs are issued with the company’s cooperation; unsponsored ADRs are set up by banks independently.
- ADR holders face currency risk, foreign withholding taxes, and depositary bank fees on top of standard equity risk.
- Compare ADR prices to the underlying shares adjusted for the ratio and exchange rate to spot mispricings.
Frequently Asked Questions
What is an ADR in finance?
An American Depositary Receipt (ADR) is a certificate issued by a US bank that represents shares of a foreign company. It trades on US exchanges in US dollars, making it easy for American investors to own international stocks without opening foreign brokerage accounts.
How do ADR dividends work?
When the foreign company pays a dividend, the depositary bank receives it in the local currency, converts it to USD, and distributes it to ADR holders. The bank deducts a small fee, and the foreign government may withhold tax at source (typically 15–30%, depending on the country and any tax treaty).
Are ADRs risky?
ADRs carry the same equity risk as the underlying foreign company, plus additional risks: currency fluctuation, political/regulatory risk in the home country, and potentially less transparent financial reporting (especially for Level I OTC programs). They’re not inherently riskier than domestic stocks — just differently risky.
What’s the difference between an ADR and a GDR?
An ADR trades specifically on US exchanges and is denominated in USD. A GDR (Global Depositary Receipt) can trade on exchanges outside the issuer’s home country — commonly in London or Luxembourg — and may be denominated in USD, EUR, or other currencies. GDRs offer broader international access.
Do ADR holders have voting rights?
For sponsored ADRs, voting rights are typically passed through to holders — the depositary bank sends proxy materials and forwards votes. For unsponsored ADRs, voting rights often remain with the bank, giving holders economic exposure but no governance participation.