Level I vs Level II vs. Level III ADRs: What’s the Difference?

An ADR is a certificate representing shares of foreign company stock held in a bank within the United States and denominated in U.S. dollars. Most are sponsored ADRs, meaning the foreign company is involved in creating the investment for U.S. investors. ADRs are issued in the United States and represent ownership of shares in a foreign company.

Level I

GDR is a negotiable instrument which is issued by the international depository bank that represents the foreign company’s stock trading world-wide. GDRs offer a means for foreign companies to access international capital markets and attract a global investor base. They provide investors with an opportunity to invest in foreign companies without directly dealing with the complexities of local exchanges. ADRs are a means for foreign companies to attract investment from U.S. investors by offering a simplified and familiar trading mechanism on U.S. stock exchanges. They facilitate global investment and broaden the opportunities for investors to diversify their portfolios. Global Depository Receipt (GDR) is a negotiable instrument used by companies to raise funds to fund its operations as a single instrument.

The depositary bank that holds the underlying stock may charge a fee, known as a custody fee, to cover the cost of creating and issuing an ADR. As with Level I ADRs, Level II ADRs can be used to establish a trading presence on a stock exchange and can’t be used to raise capital. Level II ADRs have slightly more requirements from the SEC than Level I ADRs, but they get higher visibility and trading volume. Foreign companies and their depositary bank intermediaries must comply with all U.S. laws for issuing ADRs. This makes ADRs subject to U.S. securities laws as well as the rules of exchanges. Each type offers unique opportunities for international investments.

Real-World Example of ADRs

Each issuance must comply with all relevant laws in both the home country and each of the foreign markets. Stock shares are issued and managed by the executive management of the company. Remember, as with all investments, it is essential to conduct thorough research and consider your financial goals before investing in ADRs or GDRs. GDRs offer potentially higher returns for companies in emerging markets.

1. Global Depositary Receipts (GDRs) are an investor-friendly tool that simplifies international investments.
2. The processing agent then contacts a licensed broker on the foreign exchange to purchase the company’s stock shares.
3. They’ll typically buy the less expensive security and sell the other.
4. This fee will be outlined in the ADR prospectus and typically ranges from one to three cents per share.
5. The company is publicly traded in China on the Hong Kong Stock Exchange but also trades in the U.S. on the New York Stock Exchange with the ticker BABA.

The bank manages the share issuance and administers the share listing. The underlying company does not necessarily have direct control over its depositary receipt shares as it controls its domestic shares. In the labyrinth of financial systems, instruments like American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) play a pivotal role. They have revolutionized the concept of cross-border investments and have bridged the gap between companies seeking overseas capital and foreign investors eager to invest in them.

ADRs are traded on U.S. stock exchanges, making it easier for American investors to buy and sell shares of foreign companies without needing to directly purchase shares on foreign stock exchanges. A global depositary receipt is a negotiable certificate issued by a bank. The certificate represents shares in a foreign company traded on a local stock exchange. GDRs give companies access to greater capital and investors the opportunity to invest in the equity of foreign companies. For U.S. investors, global depositary receipts offer a way to own equity in foreign companies difference between adr and gdr while trading its representative shares on a local stock exchange.

What are the different types of depository receipts?

These ADRs are created by American banks without the involvement or the permission of a non-American company. A sponsored ADR is created through an agreement between a non-American company and an American bank. Global Depository Receipts (GDR) can only be acquired in other parts of the world expect the United States. Therefore, a person wishing to purchase GDR can buy them on the London Stock Exchange and the Luxembourg Stock Exchange among other security markets across Europe. Global Depository Receipts (GDR) and American Depository Receipts (ADR) are mechanisms adopted by European and American companies to raise finances to expand their operations. Depending on where they are issued and how they are listed, GDRs can be categorized into various categories.

Global Depositary Receipt (GDR) Definition and Example

The principal difference between ADR and GDR is in the market; they are issued and in the exchange, they are listed. While ADR is traded on US stock exchanges, GDR is traded on European stock exchanges. An ADR issued under a level-I program is controlled by the foreign company and the single depository bank it selects. Because of the minimal oversight and exemption from reporting requirements, level-I ADR issues are only traded on the over-the-counter market. Note that a level-I ADR may also be unsponsored, meaning the foreign company does not have direct involvement in the ADR.

To begin offering ADRs, a U.S. bank must purchase shares on a foreign exchange. The bank holds the stock as inventory and issues an ADR for domestic trading. ADRs can be listed on the New York Stock Exchange (NYSE), the Nasdaq, and over-the-counter (OTC). The underlying security is held by a U.S. financial institution, often by an overseas branch. These securities are priced and traded in dollars and cleared through U.S. settlement systems. ADRs offer U.S. investors a way to purchase stock in overseas companies that would not otherwise be available.

The depositary bank will hold the underlying shares and issue an ADR for domestic trading. Depository Receipts (DRs) are financial instruments representing shares of domestic companies traded on foreign stock exchanges. They allow investors to invest in international companies without dealing directly with foreign markets or currencies. American depositary receipts (ADRs) are negotiable certificates issued by a U.S. depositary bank representing a specified number of shares—usually one share—of a foreign company’s stock. Both ADRs and GDRs essentially represent the shares of a foreign company, which are issued and traded in the local market currency. These are backed by the actual shares held in custody by a depository bank in the company’s home country.

In essence, GDRs open doors to global markets, allowing investors to diversify their portfolios professionally and seamlessly. ADRs are offered to investors as either a level-I, level-II, or level-III issue. Each ADR category meets different regulatory standards and is offered to investors through different outlets. As ADRs are issued by non-US companies, they have risks that is inherent to all foreign investments.