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Financial Context Wiki

American Depositary Receipts: Ratios, Programs, and Foreign-Market Risk

For educational purposes only; not investment advice.

Direct answer

Section titled “Direct answer”

An American depositary receipt (ADR) is evidence of American depositary shares (ADSs) issued by a US depositary against securities of a foreign issuer held through a custodian. In ordinary market usage, “ADR” often refers to the dollar-traded security itself. One ADS may represent one foreign ordinary share, several shares, or a fraction of one share according to the deposit agreement.

Buying an ADR is not the same as buying common stock issued by a US corporation. The investor holds rights defined by the deposit agreement, while the underlying company remains subject to its home-country laws, currency, operations, and governance. US-dollar trading and US settlement simplify access but do not remove foreign-market risk.

Structure and program levels

Section titled “Structure and program levels”

The foreign shares are deposited with a local custodian, and the US depositary issues ADSs in the stated ratio. The depositary receives distributions, converts cash when applicable, deducts taxes and contractual fees, and passes the net amount to holders. Voting instructions and non-cash distributions are handled under the deposit agreement and may involve deadlines or practical limitations.

Programs may be sponsored, with the foreign issuer entering an agreement with one depositary, or unsponsored, established without the issuer’s cooperation. More than one unsponsored facility can exist, and communications, voting arrangements, fees, and liquidity can differ.

SEC materials describe three common levels:

  • Level I: a US trading presence, generally over the counter; it cannot be used to raise capital and may be unsponsored.
  • Level II: exchange-listed trading presence without a public capital raise; the underlying class is registered and the foreign private issuer files applicable reports such as Form 20-F.
  • Level III: exchange listing plus a US public capital raise, requiring an additional Securities Act registration statement.

Form F-6 registers the depositary shares and discloses the contractual deposit terms. It is not, by itself, the foreign company’s operating disclosure document. Investors should locate the issuer’s Form 20-F, Form 6-K reports, home-market filings, and the deposit agreement.

An approximate no-friction price relationship is:

ADR value in USD ≈ local share price × underlying shares per ADS / local-currency units per USD

Actual prices can temporarily diverge because the home market may be closed, currency markets move, creation or cancellation is restricted, settlement takes time, or liquidity differs.

Worked examples

Section titled “Worked examples”

Depositary ratio and exchange rate

Section titled “Depositary ratio and exchange rate”

Suppose one ADS represents 2 ordinary shares. Each ordinary share trades at 240 local-currency units, and the exchange rate is 8 local units per US dollar:

estimated ADR value = 240 × 2 / 8 = $60

If instead one ADS represents 0.5 ordinary share, the same inputs imply 240 × 0.5 / 8 = $15. A lower ADR price does not mean the underlying company is cheaper; the ratio changed the units.

If the local share price rises 10% while the local currency depreciates 8% against the dollar, the combined approximate dollar return is:

(1 + 10%) × (1 - 8%) - 1 = 1.2%

This excludes fees, taxes, timing, and market-price deviations. A strong local-share return can therefore translate into a small dollar return.

Dividend conversion

Section titled “Dividend conversion”

Assume the company pays 6 local-currency units per ordinary share and one ADS represents 2 shares. The gross underlying distribution is 12 local units. At 8 units per dollar:

gross USD amount per ADS = 12 / 8 = $1.50

The holder may receive less after foreign withholding tax, currency-conversion costs, and depositary fees. The exchange rate used by the depositary may differ from a screen quote.

What to check before relying on an ADR quote

Section titled “What to check before relying on an ADR quote”
  • Read the deposit ratio and current deposit agreement; corporate actions can change the ratio or deliverable.
  • Identify the program level, exchange or OTC venue, sponsor, depositary, and applicable SEC reporting status.
  • Compare the ADR with the correct local security and current FX rate, using overlapping market hours where possible.
  • Review depositary charges, dividend conversion, withholding tax, voting procedure, and cancellation or conversion fees.
  • Check liquidity and spreads in both markets. Apparent arbitrage may be blocked by custody, ownership, capital-control, settlement, or short-sale constraints.
  • Evaluate home-country political, legal, audit, sanctions, capital-control, and investor-protection risks.
  • Understand termination terms. Program cancellation or delisting can require sale, conversion, transfer, or other action by a deadline.

Foreign private issuers can have reporting forms and deadlines different from US domestic issuers. A 20-F is not filed on the same timetable as a 10-K, and Form 6-K disclosure does not mirror every Form 8-K requirement. “SEC-registered” should not be interpreted as identical reporting or governance.

Common misconceptions

Section titled “Common misconceptions”

“An ADR is a US company’s common stock.” It is a depositary security representing foreign securities under a contractual arrangement.

“Trading in dollars removes currency risk.” The underlying business, share price, and distributions remain exposed to one or more foreign currencies.

“One ADR always equals one ordinary share.” The ratio can be greater or less than one and may be adjusted after corporate actions.

“Exchange listing eliminates home-country risk.” US listing adds requirements but does not replace the issuer’s home-country law, operations, ownership structure, or policy exposure.

Section titled “Related topics”

Authoritative sources

Section titled “Authoritative sources”