International Depository Receipt (IDR)

What is an IDR?

An International Depository Receipt (IDR) is a negotiable certificate issued by a bank that represents ownership of shares in a foreign company held in trust. IDRs let investors buy and sell foreign equity on local exchanges without trading directly on the issuer’s home exchange.

Naming and variants

• ADR (American Depository Receipt): the U.S. form of a depository receipt.
• GDR (Global Depository Receipt): common in Europe and traded on exchanges such as London, Luxembourg, and Frankfurt.
• IDR can also specifically refer to Indian Depository Receipts (a regulatory and market-specific form).

How IDRs work

• A bank (the depository) holds the underlying foreign shares and issues receipts that represent a specified number of those shares (often fractional: 1, 2, 3, or 10).
• The depository receipt trades on the local exchange in the local currency. Its price typically tracks the underlying share’s value after currency conversion.
• Investors gain exposure to foreign companies through familiar local trading, clearing, and settlement systems.

Benefits

For investors:
– Easier access to foreign companies without opening foreign brokerage accounts.
– Local trading hours, currency, and regulations simplify transactions.

For issuers:
– Greater access to international investors without meeting every foreign listing’s full regulatory requirements.
– Potentially lower cost and complexity compared with dual listings.

Pricing and arbitrage

• IDR prices generally mirror the underlying shares’ value on a currency-conversion basis.
• Small price discrepancies across markets can create arbitrage opportunities—buying where the instrument is cheaper and selling where it’s pricier to capture the imbalance.
• Arbitrage helps align prices but relies on market efficiency and liquidity.

Regulatory considerations and examples

• Regulatory frameworks vary by country. In 2019, India’s Securities and Exchange Board (SEBI) issued guidelines allowing Indian companies to list depository receipts on select foreign exchanges (for example, NASDAQ, NYSE, and the London Stock Exchange). Previously, Indian issuers had more limited options for issuing equity abroad.
• Common practical examples include U.S. investors buying foreign banks or automakers via ADRs listed on American exchanges rather than purchasing shares directly on foreign exchanges.

Key takeaways

• IDRs are bank-issued certificates representing ownership of foreign shares, enabling local trading of foreign equity.
• ADRs and GDRs are region-specific forms of depository receipts; “IDR” may refer broadly or to Indian Depository Receipts specifically.
• IDRs simplify investor access and broaden issuers’ investor bases while avoiding full foreign-listing obligations.
• Prices usually track underlying shares after currency conversion; minor differences can create arbitrage opportunities.