ADRs or “American Depository receipts” are securities that enable US residents to invest in companies outside of the US, which could be listed on Foreign exchanges. For example, Infosys is listed on NSE under the symbol NSE:INFY and is also listed as an ADR in the US as NYSE: INFY with a price quote in Dollars.
This means that a US investor wanting to invest in India and in Infosys does not need to open another trading and investment account in India or does not need to transfer his/her money to India. The US investor can simply buy the Infosys ADR. This not only benefits the US investor but also gives the ability for the non-US listed companies like HDFC Bank, Wipro, MakeMyTrip etc to access these US investors.
| As per the U.S Securities and Exchange Commission, there are 2000+ ADRs from 70 countries available to investors. |
The other very interesting use case of ADRs for resident Indians is to be able to invest in Indian companies (with ADRs) in USD and hence not only gain from the growth of these underlying companies but also derive returns from Dollar appreciation versus Rupee appreciation.
To take an example: If an Indian investor was to invest in Company A’s ADR 5 years ago, he/she would get dual returns from:
- the growth company A makes during the 5 years, and additionally
- the dollar appreciation versus Rupee appreciation
ADRs of which Indian Companies are listed on US exchanges?
As of November 2024, 11 Indian companies have their ADRs listed on NYSE and NASDAQ.
| The online travel operator, MakeMyTrip (NASDAQ: MMYT) is listed in the US exclusively via the ADR route. The company does not have its primary listing on the Indian stock exchanges or any other exchange. |
How do ADRs work?
The mechanics of how American Depositary Receipts work can be understood with the following steps:
Step 1: An Indian company or a foreign company (Non US company) that wants to attract US investors forms an alliance with a US based bank. For example, Deutsche Bank in the US is the bank for Infosys, Wipro and ICICI ADRs.
Step 2: The US based bank then buys the shares of the company where this company is primarily listed, such as stock exchanges from Japan, Germany, China, UK, France, Canada and more!
Step 3: The bank then in turn holds these shares in its custody and lists the ADRs on US exchanges such as Nasdaq, NYSE etc. The ADR’s can be represented in 1 stock or can be issued in fractions. Additionally, these ADR’s benefit from various corporate actions such as Dividends, stock splits etc.
Sponsored Vs Unsponsored ADRs
In case of a Sponsored ADR, the foreign company is directly involved with a U.S Bank to issue the ADRs. The bank is hence issuing the ADR’s on behalf of the company. For example in the case of Infosys: ADR’s are issued by Deutsche Bank on behalf of Infosys and listed on various US stock exchanges.
Additionally, there are 3 levels associated with Sponsored ADRs, namely:
Level 1: The ADRs here are traded over-the-counter (OTC) i.e they are not listed on major U.S. stock exchanges like the NYSE or NASDAQ. This is why they offer limited exposure and have the least regulatory requirements attached to them.
Level 2: Here, the ADRs are listed on U.S. stock exchanges and the foreign company is obligated to meet higher reporting and regulatory standards, providing more visibility and liquidity.
Level 3: In this case, the foreign company raises capital in the U.S. by issuing new shares as ADRs. The ADRs are fully listed on U.S exchanges, have strict regulatory requirements and offer the most exposure.
On the other hand, Unsponsered ADRs are created without an alliance with the foreign company and US banks, by broker-dealers who own common stock in the company. Since these ADRs are not formed by proper agreements/processes, they are traded OTC(Over-The-Counter). Additionally, since unsponsered ADR’s are created without the cooperation of the foreign company, the holders here may not receive share-holding or voter benefits.
Can Indian Investors Invest in American Depositary Receipts?
Yes, Indians can directly invest in the US stock market from India via ADR’s of various non US companies as well as Indian companies. Resident Indians can open an investment account with INDmoney, convert their Rupees to Dollars and start investing in the ADRs. You can read more about US Stock Investing and the Liberalised Remittance Scheme before staring out.
Access to Non US companies: Indians can invest in non US companies from across the globe that are listed on Non US stock exchanges such as the:
- The Stock Exchange of Hong Kong Limited (HKEX)
- Tokyo Stock Exchange (TYO)
- Frankfurt Stock Exchange (FWB), and more!
To take an example - Indians wanting to invest in China’s Alibaba Group from the Hong Kong Stock Exchange (HKG: 9988) can easily do so via its ADR counterpart (NYSE: BABA).
Access to Indian companies: Indian investors can also invest in Indian companies listed as ADRs for companies including: ICICI Bank, HDFC Bank, MakeMyTrip, SIFY Technologies and more to enjoy the benefits of dollar appreciation!
Advantages of ADRs for Indian Investors
- Easy cross border investments: You can access and invest in some of the world’s largest companies.
- Simple Process: ADRs allow you to invest in global companies through a straightforward process in U.S. dollars.
- Currency Appreciation: One gets the added advantage of potentially seeing additional gains whenever the US dollar strengthens against the Indian Rupee.
- Potential for High Growth: Many of the companies listed via ADRs are global giants in technology, healthcare, and manufacturing, sectors that have historically demonstrated long-term growth potential.
- Dividends in USD: If the foreign company pays dividends, ADR holders are eligible to receive them in U.S. dollars, potentially adding another layer of returns.
- Regulatory Ease: ADRs make it easier to invest in foreign companies without the complexities of navigating foreign regulatory environments or multiple stock exchanges.
Risks associated with American Depositary Receipts
While ADRs offer several advantages, there are also some risks to consider:
- Currency Fluctuation: Since ADRs are traded in U.S. dollars, currency fluctuations between the Indian rupee and U.S. dollar can impact returns.
- Availability: ADRs, particularly smaller ones may not be available for all foreign companies.
- Foreign Market Risks: The performance of ADRs depends on the underlying foreign company’s performance and the economic conditions in the country of origin.
- Lesser Dividend Payouts: In case ADRs are subject to dividend withholding taxes in their home countries, they may have lower dividend payouts.
Taxation on gains from ADR’s for Indians
Indian residents investing in ADRs are required to comply with the Reserve Bank of India's (RBI) regulations governing outward remittances, which means that they must have a valid bank account and tax registration number. One must take into consideration that there are two types of taxes associated with American Depositary Receipts: U.S. taxes and Indian taxes. Here’s what you need to know about them:
1. U.S. Taxes on ADRs
Dividend Tax: If the ADR you invest in pays dividends, 25% of your dividend income will be withheld for taxes in the U.S. Example: If you are supposed to receive $100 in dividends, you may only get $75 after U.S. taxes are deducted.
2. Indian Taxes on ADRs
Dividend Income: After receiving dividends (post U.S. tax deduction), the remaining amount is added to your total income in India and taxed according to your income tax slab rate.
Capital Gains Tax:
If you sell your ADRs and make a profit, you will need to pay capital gains tax in India. The rate depends on how long you held the ADR:
- Short-term capital gains (if held for less than 3 years): Taxed at your regular income tax slab rate.
- Long-term capital gains (if held for more than 3 years): Taxed at 20% with indexation benefits, which adjust the purchase price for inflation and lower your tax liability.
3. Double Taxation Relief
India and the U.S. have a Double Taxation Avoidance Agreement (DTAA), as per which the tax you paid in the U.S. on dividends can be claimed as a credit when filing your taxes in India, so you don’t get taxed twice on the same income.
All in all, American Depository Receipts are a great investment opportunity for US residents to invest outside of the US, as well as for Indians to be able to invest in Indian companies via ADRs (in USD), benefiting not just from the company’s potential growth but also derive returns from Dollar appreciation. That being said, investors must research well and take informed investment decisions.
Important Questions and Answers About ADRs
Can Indian citizens invest in ADRs directly?
Yes, Indian citizens can invest in ADRs through international trading accounts offered by brokerage platforms like INDmoney. Directly investing in ADRs gives Indian investors the advantages of accessing and investing in global companies with easy process, apart from enjoying the benefits of dollar appreciation and dividend payouts.
What is the difference between ADRs and GDRs?
ADRs (American Depositary Receipts) are listed on U.S. exchanges, while GDRs (Global Depositary Receipts) can be listed on multiple exchanges, like the US and Euro market. While ADRs are issued in dollars, GDRs are generally issued in Euros.
Do ADR holders receive dividends?
Yes, ADR holders can receive dividends that are paid in U.S. dollars. You can check your dividends on the INDmoney App by typing for “Dividends” on the US Stocks dashboard. Additionally, one must remember that while ADR’s provide the benefit of dividend payouts, 25-30% of it is withheld as Dividend Tax in US. For instance, if you are to receive $100 in dividends, you may only get $70 after U.S. taxes are deducted.
Are ADRs subject to taxes?
Yes, ADRs are subject to U.S. taxes on dividends, apart from declaring the Dividend received as income in India. Additionally, ADRs are also subject to Capital Gains Tax(Long-term and Short-Term). One must note that, as per the Double Taxation Avoidance Agreement(DTAA), the dividend tax paid in the U.S. can be claimed as a credit when filing your taxes in India. This ensures that you don’t get taxed twice on the same income.
Is investing in ADRs safe?
ADRs are a safe investment route since the listing companies, Foreign Exchanges and banks work together to get the ADR listed and are governed by a code of conduct. This ensures proper documentation and processes to be followed, providing the investor transparency. But they also have the currency risk attached to them, since it is the global bank creating the ADR that establishes the conversion rate.