Question

Describe the advantages of American Depository Receipts (ADRs).

Answer 1

1. ADR allows Indian companies to raise capital from equity markets in the USA and thereby enlarge the investor base.
2. Funds from ADR are available in US dollars, which the issuing company can use to import machinery and equipment from the USA.
3. ADR provides US citizens a hassle-free route to invest in shares of non-US companies. The investor gets the same benefits allowed to domestic shareholders of the company outside the USA.
4. Marketing of ADR creates investors' interest in the company and inspires them to invest their money.
5. Companies in the USA can use ADR to acquire controlling interest in any company abroad and improve their financial position.
6. Purchase and sale of ADR is inexpensive and quick. No broker is needed and sale proceeds are realised in dollars.
7. The US investor can reinvest the dividend received in dollars back into ADR.
8. Because of the low level of stock prices in most developing countries now relative to other markets, a well-designed depository receipt issue could attract a considerably high price per share than a similar issue sold in the domestic market, although in the case of India, when stock prices are very high, depository receipts have been issued at a discount.
9. Having the company's name in the international market would make future financing easier, as the company would then have a known track record and a broad range of markets to tap.