Security Market Operations

Meaning, Features and Advantages of Depository Receipts

Depository Receipts are negotiable financial instruments issued by banks in the foreign market for raising capital. Companies issue depository receipt in the foreign market by depositing their shares with one of custodian banks. After receiving shares from an issuing company ; custodian bank issues depository receipt in the country from where company desires to raise money and to get itself listed for trading.

According to Foreign Exchange Management Regulation ( 2014 ) – Depository Receipt ‘ means a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of eligible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘ global depository receipt ‘ as defined in section 2 ( 44 ) of the Companies Act, 2013.

Depository receipts are denominated in the currency of the country where they are traded and are governed by the rules and regulations of the same country ‘ s capital market.

Features of Depository Receipts

(1) Funds from overseas market – Depository receipts help companies in raising funds from foreign markets.

(2) Safety – Making investment in depository receipts is safe as these are issued against the security of issuer ‘ s shares deposited with the depository bank.

(3) Exchangeable – Depository Receipts ‘ holders can convert their DRs into shares after 45 days from the date of the issue. Shares received through conversion are marketable in the country where an issuer company is incorporated.

(4) Voting Rights – Depository Receipts holders cannot vote in the company ‘ s meetings. It is pertinent to mention here that voting rights of DR holders are restricted by virtue of a contract as Indian Companies Act does not authorize companies to issue non – voting shares.

(5) Liquidity – Depository Receipts are listed in the foreign stock exchanges and can be sold by foreign investors during the working hours of the stock exchange.

(6) Corporate Benefits – Depository holders are eligible to receive dividend. bonus issue, right issue in the proportion of their holding.

(7) Usage of Funds – Funds raised by the issuers form overseas markets can be used for their business operations only.

Advantages of Depository Receipts to Issuing Company

(1) Company Visibility – Depository receipts issued by the companies are listed and traded in the foreign stock exchanges which enhance their visibility globally.

(2) Availability of Funds – Issuer companies get an opportunity to raise capital from the domestic as well as overseas market.

(3) Liquidity – Enlarged trading area improves liquidity position of the issuer ‘ s shares.

(4) Greater Control – Depository receipts issued in the foreign market does not allow DR holders to cast their votes in companies decision. Hence, issuer ‘ s control over its operations remains intact.

(5) Fair Price – Overseas markets especially American stock exchanges and London stock exchanges are relatively more efficient than the Indian capital market. Valuation made by the above mentioned stock exchanges are considered more reliable and accurate. Thus, depository receipts ‘ better valuation helps Issuers ‘ in enhancing their share prices in the domestic market.

Advantages of Depository Receipts to Investors

(1) Easy to Buy and Sell – Foreign investors buy and sell depository receipts in their own country therefore ; they do not need to face the foreign exchange formalities and risk.

(2) Safe – Making investment in DR is risk free as companies can issue depository receipts only after depositing equal number of shares with the depository bank.

(3) Liquidity – Depository receipts are listed in the foreign stock exchanges and can be sold by the investors during the working hours of the stock exchanges.

(4) Diversification – DR provides an opportunity to make investment in the foreign companies besides domestic firms.

(5) Reasonable Price – Depository receipts are generally offered to foreign investors at the price lesser than the domestic price of the shares.

(6) Interchangeability – Investors can exchange their depository receipt with shares of the underlying company which can be sold in the country where a company is incorporated.

(7) Other Benefits – DR holders are similar to shareholders and except voting rights ; they enjoy all the benefits such as dividend, right issue, bonus issue etc.

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