ADRs and GDRs Explained: Indian Depository Receipts
An ADR (American Depositary Receipt) is a certificate issued by a bank in the United States that represents equity shares of a company listed outside the US. A GDR (Global Depositary Receipt) does the same job, but it is usually listed in London or Luxembourg and sold to institutions across several countries. Both let an Indian company raise foreign money without listing its actual shares on a foreign exchange.
The receipt is not a new class of share. Every ADR or GDR is backed one for one, or in a fixed ratio, by real equity shares of the Indian company that sit in India with a domestic custodian bank. The foreign depository bank issues receipts against those shares and then handles dividends, currency conversion and record keeping for overseas holders.
Indian names such as Infosys, Wipro, ICICI Bank, HDFC Bank and Dr Reddy’s Laboratories have run ADR programmes on US exchanges. Several large Indian issuers have also had GDRs listed in Luxembourg and London. The rules sit with RBI and the Government under the Depository Receipts Scheme and FEMA, with SEBI governing the domestic side.
How a depository receipt is actually created
The plumbing is simpler than the acronyms suggest. Shares go in at one end in India, receipts come out at the other end abroad, and a custodian keeps the two sides matched.
- The company issues fresh shares, or an existing shareholder offers shares, and these are deposited with a domestic custodian bank in India.
- The custodian confirms the deposit to the overseas depository bank.
- The depository bank issues receipts in an agreed ratio and lists them on the foreign exchange.
- Foreign investors buy and sell those receipts in dollars, settled in that market, with no Indian settlement involved.
- Rupee dividends are collected by the custodian, converted, and paid to receipt holders after the depository’s fee.
Why the ratio matters
One receipt rarely equals one share. A programme may be set at one ADR for two underlying shares, or one ADR for half a share, purely to land the receipt at a price foreign investors find normal. The depository bank can change the ratio later, which looks like a split or a consolidation to overseas holders even though nothing changed in India.
ADR versus GDR: the practical differences
| Feature | ADR | GDR |
|---|---|---|
| Listing venue | NYSE, Nasdaq or the US over the counter market | London Stock Exchange, Luxembourg, sometimes Dubai |
| Trading currency | US dollars | Usually US dollars, sometimes euros |
| Typical buyer | US retail plus institutions | Mostly institutions across markets |
| Disclosure load | Heavier, with US reporting and reconciliation | Lighter, and depends on the venue |
| Common Indian use | Long running programmes with continuous trading | Often a one time capital raise |
Two-way fungibility, and why it exists
For years the street worked in one direction only. A receipt holder could cancel an ADR, take the underlying Indian shares, and sell them on NSE or BSE. Going the other way was blocked, so a receipt could trade at a wide premium or discount to the Indian price with no way to arbitrage it.
Limited two-way fungibility fixed part of that. An overseas investor can now ask a registered Indian broker to buy shares in the domestic market and hand them to the custodian, who then asks the depository bank to issue fresh receipts. The catch is headroom. Reconversion is allowed only up to the quantity of receipts already cancelled and sold in India, so the gate is only as wide as past outflows.
How receipt prices track the Indian share price
Start with the local price, apply the ratio, then convert. Take a stock at Rs 1,450 in India, a ratio of one ADR to two shares, and a rupee at 84 to the dollar. The fair ADR price is (1,450 x 2) divided by 84, or about 34.5 dollars. These figures are illustrative, not live quotes.
Gaps open up because the two markets trade at different hours, because headroom limits arbitrage, and because a dollar buyer is also taking a rupee view. A receipt trading 8% above its theoretical value is telling you foreign demand is tight, not that the Indian share is mispriced.
What Indian investors should know before chasing these
- A resident Indian cannot buy ADRs through a normal Indian trading account. It needs the RBI’s Liberalised Remittance Scheme route through a broker offering US stocks, or a GIFT City platform.
- Receipt holders usually get no direct vote. The depository bank holds the voting rights on the underlying shares and often votes as the board recommends.
- Shares underlying receipts count towards foreign holding, so sectoral caps under FDI rules still bind.
- Foreign shares held abroad are taxed in India as unlisted foreign assets, with different holding periods and disclosure duties in your return.
- The depository bank charges a small annual custody fee per receipt, usually a few cents, which quietly reduces your dividend.
One common misconception is worth killing. An ADR issue does not automatically dilute existing Indian shareholders. Dilution happens only when the company issues new shares into the programme. A sponsored offering of existing shares changes who owns them, not how many exist.
Frequently Asked Questions
Can I convert my Indian shares into ADRs myself?
Not as a resident retail investor. Reconversion runs through a registered broker and the custodian, and only within the available headroom created by earlier cancellations. Most of this activity is done by foreign institutions, not individuals.
Why does an ADR sometimes trade above the Indian share price?
Because arbitrage is capped by headroom and by capital controls, foreign demand can push the receipt above fair value and keep it there. Time zone gaps and the currency view add to the spread. The premium usually shrinks when reconversion room opens up.
Do I get the dividend on an ADR?
Yes, but not the rupee amount. The custodian collects the dividend in India, tax is deducted at the applicable rate, the depository converts what is left into dollars and deducts its fee. What lands in your account is smaller than the headline dividend per share.
What happens to my ADR if the company delists the programme?
The depository bank gives holders a window to surrender receipts and take the underlying Indian shares, or to receive cash from a sale of those shares. Taking delivery in India requires a demat account and compliance with FEMA rules, which is why most holders take the cash.
Are Indian Depository Receipts the same thing in reverse?
The idea is the same, with the direction flipped. An IDR lets a foreign company raise money from Indian investors against shares held abroad. Very few IDRs have ever been issued in India, so the market is effectively dormant.
Key Takeaways
- ADRs and GDRs are receipts issued abroad against real Indian equity shares held by a domestic custodian.
- The ratio between receipts and shares is set at issue and can be changed by the depository bank.
- ADRs list in the US in dollars, GDRs usually list in London or Luxembourg for institutional buyers.
- Two-way fungibility allows reconversion into fresh receipts, but only within available headroom.
- Indian residents need the LRS or GIFT City route to buy these, and receipt holders normally get no vote.
