How can an Indian investor globally diversify their investments without constantly having to monitor the market or getting into complex processes and documentation? The answer is simple - American Depositary Receipts or ADRs.
American Depositary Receipts or ADRs could be a great way for you to get international exposure right from the comfort of your home. Let’s find out how.
What Are American Depositary Receipts?
Simply put, American Depositary Receipts or ADRs represent shares of foreign companies that are traded on U.S. exchanges, like the NYSE or NASDAQ. This empowers non-U.S. companies to list their shares in the U.S., making it easier for U.S. investors to buy them.
Did you know? Infosys, ICICI, Wipro, MakeMyTrip, Dr. Reddy’s Lab are some Indian companies with registered ADRs in the US stock market. |
Sponsored and Unsponsored ADRs
In case of a Sponsored ADR, the foreign company is directly involved with a U.S Bank to issue the ADR. Furthermore, there are 3 levels associated to this type of ADR:
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, Unsponsored ADRs are created without the involvement of the foreign company. Instead, one or more U.S. banks issue them. These ADRs are traded on OTC markets i.e there may be several different ADRs for the same foreign company, which could lead to inconsistencies in reporting and dividends.
Can Indian Investors Invest in American Depositary Receipts?
Absolutely. For Indian investors, ADRs are a simple and easy alternative to invest in global companies without dealing with the complexities of international markets.
For example - A U.S. bank purchases shares of a foreign company and issues ADRs that represent these shares. In this case, an Indian investor will now be able to buy and sell ADRs just like any U.S. listed stock. The value of the ADRs reflects the performance of the underlying foreign stock.
Advantages of ADRs for Indian Investors
- Global Exposure: You can access some of the world’s largest companies that are not listed on Indian exchanges, such as Apple, Alphabet, and Netflix, among others.
- Simple Process: Instead of going through the hassle of currency conversion, foreign regulations, and different stock exchanges, ADRs allow you to invest in global companies through a straightforward process in U.S. dollars.
- Currency Diversification: By investing in ADRs, Indian investors get the added advantage of currency diversification. If the U.S. dollar strengthens against the Indian rupee, your investment in ADRs could see additional gains.
- Potential for High Growth: Many of the companies listed via ADRs are global giants in technology, healthcare, and manufacturing, sectors that have demonstrated long-term growth potential.
- Dividends in USD: If the foreign company pays dividends, ADR holders will 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.
How To Invest in ADRs on INDmoney?
Investing in ADRs from India is a simple process that can be completed with the below mentioned steps:
Open an International Trading Account To invest in ADRs, you’ll need an international trading account, which can be opened through your existing INDmoney account | |
Fund Your Account Add money to your trading wallet, which will then seamlessly be converted into USD for your international trading,, as ADRs are traded in U.S. dollars. | |
Research and Select ADRs Look at factors like the company’s financial performance, future growth potential, and the current market price. | |
Place the Trade Select the ADR you want to invest in, choose the number of shares, and place your order through your brokerage platform. | |
Track Your Investment
|
Pricing and Costs associated with ADRs
Pricing and costs of investing in American Depositary Receipts (ADRs) can differ basis the following factors:
1. Conversion ratio or the number of foreign shares that underlie each ADR. This ratio affects the price of an ADR and corresponding level of the ADR.
2. Depositary bank fees or the fee charged by the bank for its services in issuing and maintaining the ADR program. These fees include initial setup fees, custody fees, transaction fees, and other expenses depending on the level of the ADR.
3. Foreign exchange rates or the price at which the ADRs are priced in U.S. dollars. Changes in foreign exchange rates can impact the value of the ADR.
4. Trading fees is the fee that an investor may be obligated to pay for buying and selling ADRs, depending on the broker and the trading platform.
One must research and be aware of the costs before investing in ADRs.
Tax Implications of American Depositary Receipts
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 a simple breakdown of the same:
1. U.S. Taxes on ADRs
- Dividend Tax: If the ADR you invest in pays dividends, 25-30% 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 $70 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.
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.
- Liquidity: Some ADRs may have lower trading volumes, implying that it could be harder to buy or sell them compared to local stocks.
- 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.
- Voting Rights: Investors have little or no voting rights compared to their foreign counterparts, limiting influence.
Can Indian citizens invest in ADRs directly?
Yes, Indian citizens can invest in ADRs through international trading accounts offered by brokerage platforms like INDmoney.
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 exchanges outside the U.S.
Do ADR holders receive dividends?
Yes, ADR holders can receive dividends that are paid in U.S. dollars.
Are ADRs subject to taxes?
Yes, ADRs are subject to U.S. taxes on dividends, and investors may also have to report earnings in their home country, including India.
Is investing in ADRs safe?
Like all investments, ADRs come with risks, including currency risk and foreign market risks. It’s important to research thoroughly before investing.