International Depository Receipt (IDR)

International Depository Receipt (IDR): An Overview

An international depository receipt (IDR) is a negotiable certificate issued by a bank. It addresses ownership of a number of shares of stock in a foreign company that the bank holds in trust.

International depository receipts are all the more frequently known in the U.S. as American depository receipts (ADRs). In Europe, they are known as Global Depository Receipts and trade on the London, Luxembourg, and Frankfurt exchanges.

The abbreviation IDR likewise is utilized to recognize Indian Depository Receipts.

Grasping the IDR

IDRs are purchased by investors as an alternative to the direct purchase of foreign stocks on foreign exchanges. For instance, American traders can buy shares of the Swiss bank Credit Suisse Group AG or Swedish automaker Volvo AB directly from American exchanges through ADRs.

For the companies, the IDR makes it more straightforward and less expensive to arrive at international buyers. The company isn't required to consent to the entirety of the listing and regulatory requirements of each and every country in which it wishes to sell shares.

IDRs generally address fractional ownership of the underlying stock, with each IDR addressing one, two, three, or 10 shares. The price of the IDR generally trades close to the value of the underlying shares on a money change basis.

Periodic divergences in price are taken advantage of for arbitrage opportunities. Arbitrage is the simultaneous purchase and sale of an asset with the aim of benefitting from an imbalance in the price on different exchanges and different currencies. The trade takes advantage of the price differences of indistinguishable or close indistinguishable financial instruments. Arbitrage can exist because of market inefficiencies.

Special Considerations on IDRs

The regulatory body for the capital markets of India, the Securities and Exchange Board of India (SEBI), issued new rules in 2019 for companies listing depository receipts. The rules take into consideration Indian companies to list depository receipts on a limited number of foreign exchanges, including the NASDAQ, the NYSE, and the London Stock Exchange.

This is a flight for regulators of the markets in India. While Indian companies had the option to issue debt securities, called masala bonds, on international exchanges, a similar option was not available for equity shares.

The value of an ADR ought to unequivocally match the value of the underlying stock. Little disparities in prices among exchanges are taken advantage of by arbitrage traders.

The National Stock Exchange of India (NSE) was established in 1992 and began trading in 1994, conversely, with the Bombay Stock Exchange (BSE), which has been in presence beginning around 1875. The two exchanges follow similar trading mechanism, trading hours, and settlement process.

Features

• An IDR or ADR is a certificate of ownership of a number of shares in a company that trades on a foreign exchange.
• Investing in IDRs is an alternative to purchasing stock on a foreign exchange.
• For the companies, it enables greater access to foreign investors.