Do you know what ADRs are? A complete guide for investors

As global investing becomes more accessible, American Depositary Receipts (ADRs) offer investors a convenient way to gain exposure to international companies through US stock exchanges. ADRs enable investors to buy shares of foreign companies in US dollars without opening overseas trading accounts or transacting directly on foreign exchanges.

For example, Infosys is listed on the NSE under the ticker INFY and also trades as an ADR on the New York Stock Exchange (NYSE). This allows US investors to invest in the company through their domestic markets while helping Infosys tap a wider global investor base.

However, the relevance of ADRs for Indian investors has evolved over time. Mohit Gulati, CIO and Managing Partner at ITI Growth Opportunities Fund, said ADRs were once an attractive avenue for Indian investors seeking dollar-denominated exposure to global companies that were otherwise difficult to access.

According to Gulati, the investment landscape has changed significantly with the availability of international mutual funds, direct overseas investing under the Liberalised Remittance Scheme (LRS), and India-listed exchange-traded funds (ETFs) tracking global markets. As a result, the structural advantage that ADRs once offered has diminished.

He noted that ADRs now serve a more specialised purpose, particularly for investors tracking price differences between dual-listed stocks or those with specific tax, estate-planning, or dollar-asset-allocation requirements. For most retail and institutional investors looking for broad international exposure, Gulati believes newer investment routes have largely replaced ADRs as the preferred option.

How do ADRs work?

ADRs are negotiable instruments provided by a US financial institution that represent ownership in a foreign company’s shares.

The usual procedure unfolds like this:

A foreign business collaborates with a US depositary bank.

The bank acquires or maintains shares of the foreign company in its domestic market.

In exchange for these shares, the bank issues ADRs that trade on US stock markets such as the NYSE or Nasdaq.

Investors can buy and sell these ADRs similarly to any other stock listed in the US.

Holders of ADRs typically enjoy benefits such as dividends, stock splits, and other corporate actions.

ADRs of which Indian Companies are listed on US exchanges?

Why ADRs matter for Indian investors?

ADRs are beneficial not only for US investors but also for residents of India, who can invest in ADRs via international investment platforms to access both Indian and foreign companies listed in the US.

For example, Indian investors can purchase ADRs of companies such as HDFC Bank, ICICI Bank, Infosys, and MakeMyTrip. They can also invest in global brands like Alibaba, whose ADR is listed on the NYSE under the ticker symbol BABA.

A significant benefit is the potential to benefit from the company's growth alongside any appreciation of the US dollar against the Indian rupee.

Key benefits of ADRs

Effortless global diversification

ADRs allow investors to engage with top firms across various regions and industries without needing to navigate foreign stock markets.

Dollar-denominated investments

Investments are conducted in US dollars, providing investors with exposure to currency fluctuations in addition to stock performance.

Income from dividends

Numerous ADRs distribute dividends in US dollars to investors.

More manageable regulatory environment

Investors can access international companies via US markets without the hassle of navigating multiple foreign regulatory frameworks.

Access to rapidly growing companies

ADRs give investors the opportunity to invest in widely recognised global brands in sectors including technology, healthcare, consumer products, and manufacturing.

Sponsored vs Unsponsored ADRs

Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.