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University of petroleum & energy studies

College of legal studies


Dehradun

ABSTRACT : American Depository Receipts by Indian


Company

Submitted to

Submitted By-

Shruti Reddy

Prashant
Singh

Asstt. Professor
(Hons.) 6th sem.

B.A. L.L.B

COLS

Roll no.

R450213080
American Depository Receipts by Indian Company
Financial markets connect capital from investors to the most productive applications in firms.
Firms seek the lowest possible cost of capital for financing projects. When low cost capital is
available, a larger set of projects are financially viable, and greater investment takes place.
Equity capital from global investors is likely to be cheaper when compared with domestic
sources, as global investors are internationally diversified. There are two alternative mechanisms
through which foreign investors can connect with firms in India. The first mechanism involves
direct participation by foreign investors in the Indian financial markets. The second mechanism
involves participation by Indian firms in overseas financial markets. Each of these two methods
has strengths and weaknesses. The local market is likely to be more liquid and better at capturing
information about the firm raising capital. The overseas market is easier to access for many
overseas investors. An American depositary receipt (ADR) is a simple way for investors to invest
in companies whose shares are listed abroad. The ADR is essentially a certificate issued by a
bank that gives the owner rights over a foreign share. It can be listed on a stock exchange and
bought and sold just like a normal share. The holder of an ADR is entitled to all benefits such as
dividends and rights issues from the underlying shares. They are sometimes, but not always, able
to vote. ADRs represent ownership of a non-US companys shares to be traded in the American
market. The ADRs thus enable the US investors to buy shares of foreign companies without
having to undertake cross border transactions. The price of ADRs is in US Dollars. From the
view point of U.S. investors, the ADRs are like shares of US based companies. Each ADR can
represent one share or fraction of a share or multiple shares of the company concerned. The price
of an ADR moves closely with the share price of a company in its home market, adjusted for the
ration in which ADRs have been issued against the companys shares. The ADR system
facilitates the raising of capital by Indian companies from US investors.
In an open economy, real sector firms that compete internationally require inputs that have
international characteristics regarding price and quality. In a competitive market, if different
firms face different input costs, the firm with higher input cost is at a disadvantage. For Indian
firms to be globally competitive, it is essential that they have access to capital as well as quality
financial services at the lowest cost. Therefore, there is no reason to deny any domestic firm
access to international capital markets.