Depository Receipt (DR) is used as means in the international capital market to raise fund vis equity. This is a marketable instrument.
ADR and GDR is a certificate document where there is a backing of underlying shares issued by the Indian Company.
ADR
An Indian company issues ADRs in the US so that US investors can invest in its shares.
GDR
The same company issues GDRs in London to attract international investors.
IDR
A foreign company issues IDRs in India so that Indian investors can buy its shares in INR.
Before understanding the concept of ADR, GDR, and IDR in detail, let us begin with a simple case. Suppose an Indian company such as Reliance Sunshine Ltd wants to raise funds from investors in the United States instead of relying only on the domestic capital market. In such a situation, the company needs a mechanism through which US investors can invest in its shares easily without directly trading in the Indian stock market.
This requirement is fulfilled through instruments known as Depository Receipts. Through this arrangement, the company’s shares are held by a custodian bank in India, while a depository bank in the United States issues receipts representing those shares to investors. These receipts are then traded in the US capital market.
Using this case, we will understand how an Indian company can raise funds from the US market and how instruments like ADR, GDR, and IDR facilitate cross-border investment in international capital markets.
Raising Funds through ADR
Suppose Reliance Sunshine Limited wants to raise funds from investors in the United States through American Depository Receipt (ADR).
Appointment of Depository Bank
Reliance appoints a US Depository Bank such as JPMorgan Chase or Citibank.
Role of Depository Bank:
- Issue ADRs in the US market
- Hold underlying shares of Reliance
- Manage dividend payments to investors
Custodian Bank in India
Reliance deposits its shares with an Indian custodian bank, for example ICICI Bank.
These shares back the ADRs issued in the US.
Example:
1 ADR = 2 Reliance shares
If 10 million ADRs are issued, the custodian bank holds 20 million shares.
ADR Issue in the US Market
The ADRs are listed on a US exchange such as the New York Stock Exchange.
US investors buy ADRs in US dollars.
Example:
ADR price = $20
ADR issued = 10 million
Total fund raised:
Flow of Funds
The investors pay $200 million to the Depository Bank.
The Depository Bank then transfers the proceeds to Reliance.
This is done through international banking settlement, usually via correspondent banking channels.
Is Nostro Account Used?
Unlike trade payments under LC or remittances, ADR proceeds are not typically routed through Nostro accounts of commercial banks in the same operational way.
Instead:
- Funds are collected in the Depository Bank’s account in the US.
- The funds are then remitted to the issuing company’s bank account in India.
- The transaction passes through the international capital market settlement system.
So:
- Nostro accounts may be involved at the bank settlement level,
- but ADR issuance is primarily a capital market transaction, not a trade finance transaction.
Benefit to Reliance
By issuing ADRs:
- Reliance raises $200 million
- Accesses US investors
- Improves global visibility
- Diversifies funding sources
| ADR Issue Mechanism |
| US Investors │ │ Buy ADRs (USD) ▼ Depository Bank (USA) Issues ADR Certificates to Investors │ │ Requests underlying shares ▼ Custodian Bank (India) Holds shares of the issuing company (Shares deposited by Reliance with custodian) │ │ Shares held as backing ▼ Reliance Industries Limited Receives ADR issue proceeds │ │ Funds remitted to India ▼ Back to Company |
| Step 1 – Company Deposits Shares |
| Reliance Sunshine Limited deposits a block of shares with a Custodian Bank in India. |
| Example: 20 million shares deposited. |
| Step 2 – Custodian Confirms to Depository Bank |
| The Custodian Bank informs the Depository Bank in the US that the shares are held on behalf of ADR investors. |
| Step 3 – ADR Issued |
| The Depository Bank (for example JPMorgan Chase) issues American Depository Receipts to US investors. |
| Example: |
| 1 ADR = 2 Reliance shares. |
| Step 4 – Investors Pay in USD |
| US investors purchase ADRs in the US market (for example on the New York Stock Exchange). |
| Funds collected = $200 million |
| Step 5 – Funds Remitted to the Company |
| The Depository Bank transfers the proceeds to Reliance in India through international banking channels. |
Comparative Table: ADR vs GDR vs IDR
| Basis | ADR (American Depository Receipt) | GDR (Global Depository Receipt) | IDR (Indian Depository Receipt) |
| Meaning | Depository receipt issued in the US representing shares of a foreign company | Depository receipt issued in international markets representing shares of a foreign company | Depository receipt issued in India representing shares of a foreign company |
| Market of Issue | United States capital market | International markets (Europe, London, Luxembourg etc.) | Indian capital market |
| Currency of Trading | US Dollar | Usually US Dollar or Euro | Indian Rupee |
| Investors | US investors | Global investors | Indian investors |
| Underlying Shares | Shares of a foreign company held by custodian bank | Shares of issuing company held by custodian bank | Shares of foreign company held by custodian bank |
| Regulatory Authority | Regulated by U.S. Securities and Exchange Commission | Regulated by international market rules | Regulated by Securities and Exchange Board of India |
| Trading Location | US stock exchanges | International stock exchanges | Indian stock exchanges |
| Example | An Indian company issuing ADRs in US market | An Indian company issuing GDRs in London market | A foreign company issuing receipts in India |
| Purpose | Raise capital from US investors | Raise capital from global investors | Allow Indian investors to invest in foreign companies |