What is American Depositary Receipt (ADR)?
What are ADRs?
Selfridges, a British retailer was the first ADR and it was introduced by JPMorgan in the year 1927.
The ADRs are issued by a particular Depositary bank. The underlying securities are under the safe custody of the foreign bank that acts as a custodian. The transaction requires a stock broker who purchases the shares in the open market local to the foreign company. The price of the ADR is along the same trend as the price pattern of the foreign security that it tracks in its local market.
Programs of ADRs
The different programs include:
Sponsored Level I ADR: These are also traded in the OTC market that functions post the regular trading hours. In this type of ADR the company is associated with one Depositary that acts as the transfer agent for the shares traded. The reporting system in this type is kept at the minimum level and the company need not issue quarterly or annual reports in compliance with the U.S.GAAP (denoting the generally accepted accounting principles). The only restriction is that the company must have a security listed in the local stock exchange and publish its annual report as per that country’s laws. This report must be made available on its website for the benefit of the investors in America.
Sponsored Level II ADRs: The foreign company that wishes to enter this program must file a registration statement with the U.S.SEC (Securities and Exchange Commission). A form (20F) has to be filed annually. The information required to be filled in this form are not as strict as for domestic US companies. This report must be submitted within six months of the company’s fiscal year end. In this type of program the shares are listed on any of the U.S. stock exchanges, though this implies that the company must meet the listing requirements.
Sponsored Level III ADRs: While the level II offers the listing facility the level III offers the offering facility. This program is the highest level a foreign company can sponsor. The rules to be followed in this case are stricter than the level I and level II. In the level III the foreign company is allowed to raise capital and therefore must actually issue shares. Therefore, it must file form F-1, which is the prescribed format of the offer prospectus. In addition they must also file the form 20-F and adhere strictly to the U.S.GAAP standards. All the material information that the company gives in the local market should be filed with SEC by way of form 6K. Some of the level III companies include Vodafone and British Telecommunications.
Restricted programs: These are companies that allow trade between few individuals and not to outsiders. Under the restricted program there are two types of issuance of shares, one under Rule 144-A and the second under Regulation S. The shares issued against Rule 144-A is known as privately placed and the Regulation S is offshore. In the offshore the restriction is for U.S. public and these shares can be registered and issued by offshore non-U.S. residents.