Are Depositary Receipts Still Relevant in U.S. Markets?

Depositary Receipts in U.S. Markets have historically played a crucial role in bridging international investments and making it easier for U.S. investors to access foreign companies. American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) became popular tools for companies seeking exposure to global capital markets, especially the lucrative U.S. investor base. But with advancements in technology, evolving regulations, and shifting investor behaviors, it raises an important question: Are Depositary Receipts still relevant in U.S. markets today?

What Are Depositary Receipts and How Do They Work?

Depositary Receipts (DRs) are financial instruments issued by a depositary bank that represent shares in a foreign company. Essentially, they allow investors in one country to invest in companies from another country without dealing with the complexities of international trading.

There are two primary types of depositary receipts:

American Depositary Receipts (ADRs): These are traded on U.S. exchanges like the NYSE or Nasdaq and are denominated in U.S. dollars.
Global Depositary Receipts (GDRs): These are usually traded on European exchanges and are aimed at global investors.

By using DRs, investors can buy shares of foreign companies as easily as they would a domestic stock, while companies can access foreign capital without listing their shares directly on foreign exchanges.

The Historical Importance of Depositary Receipts in U.S. Markets

Depositary Receipts have been a critical link between global companies and U.S. investors since the 1920s, when J.P. Morgan launched the first ADR for British retailer Selfridges. ADRs simplified the process for U.S. investors to buy shares in foreign companies by handling issues like:

Currency conversion
Compliance with foreign regulations
Custody of shares
Dividend payments in U.S. dollars

This simplified structure led to widespread adoption, particularly among companies in emerging markets looking to tap into the deep pools of U.S. capital.

As of 2023, over 2,700 companies from 70 countries are using depositary receipt programs to raise funds and attract international investors. The total DR trading value reached an impressive $4.1 trillion USD, demonstrating their continued significance.

Why Some Companies Are Moving Away from Depositary Receipts

In recent years, there’s been a noticeable shift in how foreign companies access U.S. investors. Instead of ADRs, many are choosing direct listings on U.S. exchanges. In fact, nearly 944 foreign private issuers are now directly listed on U.S. markets without ADR programs.

Key reasons for this shift include:

Lower Costs: Direct listings avoid many of the fees associated with depositary banks and ADR programs.
Simplified Compliance: Companies can manage a single listing framework rather than adhering to both their home country and U.S. regulations through an ADR.
Greater Visibility and Control: A direct listing can enhance brand visibility and give the company more control over its investor relations.
Improved Technology and Globalization: Trading platforms and brokers now offer easier access to foreign stocks, reducing the need for DRs.

The Pros and Cons of Depositary Receipts in U.S. Markets

Despite the rise of direct listings, Depositary Receipts in U.S. Markets still offer several advantages. However, they are not without drawbacks.

Advantages of Depositary Receipts

Simplified Access for Investors: ADRs provide an easy way for U.S. investors to buy shares in foreign companies.
U.S. Dollar Denomination: Investors avoid currency exchange issues since ADRs trade in USD.
Regulated Marketplaces: ADRs are listed on major U.S. exchanges, ensuring transparency and liquidity.
Investor Relations Support: Depositary banks often help companies with compliance, reporting, and investor relations activities.
Strategic Market Entry: DRs offer foreign companies a controlled way to test U.S. investor appetite without a full listing.

Disadvantages of Depositary Receipts

Additional Costs: Companies must pay ongoing fees to the depositary bank, which can be significant.
Dual Regulation Compliance: Companies must navigate both U.S. and home-country regulations.
Potentially Limited Liquidity: Especially in unsponsored ADR programs, where trading volumes can be lower.
Limited Voting Rights: Investors in ADRs often have fewer rights compared to those who own shares directly.
Exit Tax Implications: Some countries impose taxes when founders or early investors exit via ADRs.

Market Trends and Future Outlook

While direct listings are growing in popularity, DR programs remain robust. Sponsored ADR programs, in particular, offer advantages that are difficult to replicate through direct listings. As of the latest data:

1,273 sponsored DR programs are active worldwide.
1,447 unsponsored DR programs are in place, providing passive investment options.
North America remains the largest investor region, with DR holdings focused on key markets such as China, Japan, and Europe.

The Role of Emerging Markets

For companies from emerging economies, ADRs remain a strategic entry point to global capital markets. These markets often have restrictions on direct foreign ownership, making DRs the best (or only) option.

Innovations in DR Programs

Deposit banks like BNY Mellon, Citibank, Deutsche Bank, and JPMorgan are evolving their DR services. They offer enhanced transparency, more robust investor communication tools, and streamlined compliance support to address modern challenges.