Depositary Receipt

A depositary receipt is a security issued by a bank that represents ownership of shares in a company listed in another country. The underlying shares are deposited with a custodian in the company's home market, and the bank, known as the depositary, issues receipts against them in the investor's market. The receipts trade, settle and pay dividends in the local currency and under local market practice, so investors can hold a foreign company without dealing on a foreign exchange. It is also known as securities depository receipt.

The best-known form is the American depositary receipt, which trades in the United States in US dollars. A global depositary receipt is offered in more than one market outside the issuer's home country and is typically listed in London or Luxembourg. Other countries have their own versions, such as Indian and European depositary receipts. The first American depositary receipt was created by J.P. Morgan in 1927 for the British retailer Selfridges.

A broker buys the company's ordinary shares in the home market and delivers them to the depositary's local custodian. The depositary bank then issues the corresponding number of receipts to the broker for delivery to the investor. The process works in reverse on cancellation: the investor surrenders receipts, and the depositary releases the underlying shares for sale in the home market. The depositary charges a fee for each issuance and cancellation.

Each receipt represents a fixed number of underlying shares, or a fraction of one, known as the ratio. The ratio is chosen so that the receipt trades at a price that is conventional in the target market. Because receipts can be converted into shares and back, arbitrage keeps the receipt price close to the home-market share price adjusted for the ratio and the exchange rate.

In a sponsored programme, the company appoints a single depositary under a deposit agreement that sets out the rights of holders, the fees and the services to be provided. The company controls the programme and usually undertakes to supply information to holders. In an unsponsored programme, one or more depositaries issue receipts without the company's involvement, in response to investor demand. Unsponsored receipts trade only over the counter and may carry no voting rights.

• Level I. Receipts trade over the counter. The company does not have to register its shares under the full United States reporting regime, provided it publishes its home-country disclosures in English. No capital can be raised.
• Level II. Receipts are listed on a United States exchange. The company must register with the Securities and Exchange Commission and file annual reports, but still raises no new capital.
• Level III. The company makes a public offering of new shares in the form of receipts, in effect an initial public offering in the United States, with full registration and a prospectus.
• Rule 144A and Regulation S. Receipts are sold by private placement to large institutional buyers in the United States, or offered outside it, without registration.

The depositary acts as the link between the company and receipt holders. When the company pays a dividend, the depositary receives it in the home currency, converts it, deducts its fees and any withholding tax, and pays holders in the currency of the receipt. It passes on notices, arranges proxy voting where the deposit agreement allows, and handles rights issues, splits and other events, which can be more complicated than for local shares because some entitlements cannot legally be offered to foreign holders and must be sold for cash instead. This work is a branch of corporate action processing.

For companies, depositary receipts widen the shareholder base, raise visibility abroad, provide a currency for acquisitions and, at the higher levels, a route to raise capital. For investors, they offer foreign exposure with domestic trading hours, settlement and custody, and they suit funds that are not permitted to hold foreign-listed shares directly.

The risks are those of the underlying company and its country, plus some specific to the structure.

• Currency risk. The receipt price and dividends move with the exchange rate between the two currencies, even when the home-market share price is unchanged.
• Fees. Depositaries may charge annual service fees and dividend fees, which are deducted from distributions or collected through brokers.
• Weaker rights. Holders depend on the deposit agreement for voting and information, and may be excluded from some offers.
• Programme termination. A company or depositary can end a programme, forcing holders to convert or accept sale proceeds. Political events can also intervene: after 2022, Russian law required domestic companies to end their overseas programmes, and many holders were left unable to trade or convert.
• Home-market oversight. Accounting and audit standards may be harder for the host regulator to inspect.

Receipts are securities in the market where they trade and fall under its offering, listing and disclosure rules. The underlying shares remain subject to the company law and takeover rules of the home country, including any limits on foreign ownership. Some home countries cap the share of a company's capital that may be held in receipt form or require central bank approval for conversion. Admission to an exchange follows that venue's listing admission procedures.