Depositary Receipts: Trading Foreign Shares Through a Local Security
For educational purposes only; not investment advice.
Direct answer
Section titled “Direct answer”A depositary receipt is a tradable security issued by a depositary bank that represents shares of a foreign company. Investors trade the receipt in one market, often in a local currency, while the underlying ordinary shares are held through a custody structure.
An ADR, or American Depositary Receipt, is the U.S. market version of this structure. Other markets can have their own depositary receipt programs.
How it works
Section titled “How it works”The key facts are the depositary bank, the custodian, the underlying ordinary shares, the receipt-to-share ratio, fees, voting process, dividend conversion, and termination terms.
If 1 receipt represents 2 ordinary shares, the rough parity value is:
receipt value ≈ 2 × foreign share price × exchange rate
Actual prices can differ because markets trade at different hours, currencies move, brokers charge fees, local capital controls may exist, and liquidity can differ between the receipt and the home-market share.
Sponsored programs involve the foreign company and a depositary agreement. Unsponsored programs may have less issuer involvement, fewer investor-relations materials, and different disclosure convenience.
Example
Section titled “Example”Suppose a foreign ordinary share trades at €20, one depositary receipt represents 2 shares, and the euro-dollar rate is 1.10.
The rough parity value is:
2 × €20 × 1.10 = $44
If the receipt trades at $45, the difference is not automatically an arbitrage opportunity. Taxes, conversion fees, time-zone gaps, settlement, capital restrictions, and bid-ask spreads may absorb or explain the difference.
- Currency risk: The receipt price reflects both the stock price and exchange-rate movement.
- Fee and tax risk: Depositary fees, withholding tax, and conversion costs can reduce returns.
- Disclosure risk: Foreign issuers may report under different rules and calendars.
- Liquidity risk: Receipts and home-market shares can have very different trading volume.
- Program risk: A depositary program can be amended or terminated, changing how holders receive cash, shares, or other rights.
Common misconceptions
Section titled “Common misconceptions”A depositary receipt is not always identical to directly owning the foreign ordinary share. Voting, fees, taxes, and conversion rights can differ.
ADR is not the whole category. ADRs are U.S. depositary receipts; depositary receipt structures can exist in other markets too.
Price gaps do not guarantee easy arbitrage. Real-world frictions often matter more than the headline spread.
Related topics
Section titled “Related topics”Sources
Section titled “Sources”- SEC: international investing guidance and Form F-6 registration framework.
- Nasdaq: listing-rule references for securities traded on U.S. markets.