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Depository Receipts or DRs are negotiable securities traded on US and European stock exchanges but represents a foreign company’s publicly traded shares. In short, a depository receipt represents one of more share of a foreign company traded outside the country. DRs are traded just like stocks and DR holders have same privileges as a local shareholder (voting rights and dividends). The most common examples of DRs are American Depository Receipt (ADR) and Global Depository Receipt (GDR).

The process of issuing a DR (e.g.: ADR) is,

• A depository bank (U.S. institution) buys a number of shares of a foreign currency through its foreign branch or through a local custodian bank.
• The above step is initiated usually through an U.S. broker usually with the help of a local brokerage firm.
• Once the custodian bank verifies the delivery of shares, the depository bank issues ADRs to the U.S. brokerage firm based on a pre-determined ADR ratio.
• Now the ADRs can be publicly traded though U.S. exchanges like NYSE, Nasdaq and AMEX.
• All transactions are done in U.S. dollars (also in Euro – European exchanges).

There is price parity in local and foreign traded price underlying shares of the DR. Any price diversion (in dollar value) can be used by the broker as an arbitrage opportunity. Fore example, if the dollar value of local share is less than DR share value, then the broker will buy more shares from local market to issue ADR; and if the local share price is higher than DR share value, then the broker will sell ADRs back to local market (known as Cross-border trading).

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