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An American Depositary Receipt (ADRs) is a negotiable certificate issued by a US depositary bank that represents a specific number of shares in a non-US company. ADRs trade on American stock exchanges (like the NYSE and Nasdaq) or over the counter (OTC) just like regular US stocks.
In this article, you will learn about ADRs, types, and how ADRs differ from global depositary receipts.
Key Takeaways
- ADRs represent ownership in a non-US company that trades on a US stock exchange, is denominated in US dollars, and settles under US market rules.
- ADRs program vary by level (Level I, II, III) and by sponsorship, which determines SEC reporting standards and US exchange availability.
- Indian residents invest in US-listed ADRs via the RBI Liberalised Remittance Scheme (LRS), subject to the $250,000 annual limit and applicable TCS provisions.
- Dividends are subject to US withholding tax (reduced to 25% under the India-US DTAA via Form W-8BEN) and are taxable in India, eligible for Foreign Tax Credit via Form 67.
- For Indian tax purposes, ADRs are treated in line with unlisted foreign shares, carrying a 24-month long-term holding period threshold taxed at 12.5% without indexation.
What is an American Depositary Receipt?
ADRs are certificates issued by a US bank that represent a specific number of shares or fractions of a share in a non-US company.
This structure allows foreign companies, including eligible Indian firms, to tap US capital markets and build investor visibility without undertaking a full US primary listing. Simultaneously, it allows international investors to gain exposure to foreign equities through standard US brokerage accounts in US dollars.
How ADRs Work
- Program setup: A foreign company partners with a US depositary bank to structure the ADRs issuance ratio.
- Custody: The depositary bank or a local custodian purchases and secures the underlying shares in the home market.
- Issuance: Depositary receipts are issued against those shares and listed on a US exchange or OTC market.
- Trading & corporate actions: US investors buy and sell ADRs like standard domestic stocks, while the depositary bank manages dividend conversions from local currency to US dollars.
Types of ADRs Programs
| Program Type | Listing Venue | Reporting Requirement | Use Case |
| Level I | OTC market only | Minimal SEC reporting | Companies testing US investor interest |
| Level II | US exchanges (NYSE, Nasdaq) | Full SEC registration and reporting | Companies seeking US liquidity without raising fresh capital |
| Level III | US exchanges | Full SEC registration and prospectus | Companies raising fresh capital via a US public offering |
| Sponsored | Any level | Formal agreement with depositary bank | Most actively traded and regulated ADRs |
| Unsponsored | OTC only | No direct company involvement | Bank-initiated programs, less common today |
How is a Global Depositary Receipt (GDR) Different From ADRs?
ADRs and Global Depositary Receipts (GDRs) operate on the same underlying principle, with one key difference: where they trade.
| Feature | American Depositary Receipt (ADRs) | Global Depositary Receipt (GDR) |
| Primary Trading Venue | United States (NYSE, NASDAQ, OTC markets) | International exchanges (London, Luxembourg, etc.) |
| Regulatory Oversight | Strict US SEC registration and reporting rules | Regulated by local stock exchange and listing jurisdiction |
| Target Investor Base | US domestic retail and institutional investors | International institutional and global investors |
| Currency | Denominated exclusively in US Dollars (USD) | Denominated in US Dollars (USD), Euros, or local currencies |
| Issuance Purpose | To tap specifically into US capital markets and investor pools | To raise capital simultaneously across multiple international markets |
How Indian Investors Access ADRs
Indian residents cannot purchase ADRs directly on domestic stock exchanges. Access requires routing capital through approved channels:
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Liberalised Remittance Scheme (LRS): Resident individuals can remit up to $2,50,000 per financial year for permitted capital account transactions, including foreign security investments.
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International trading accounts: Indian brokers and fintech platforms partnering with US brokers allow investors to route LRS remittances into US securities.
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GIFT City route: Platforms operating within India's International Financial Services Centre (IFSC) in GIFT City facilitate global investments under specific regulatory frameworks.
Read More About: Foreign Remittance TCS Under LRS
Advantages and Disadvantages of ADRs
Investing in American Depositary Receipts bridges international markets with domestic brokerages, offering unique global exposure alongside distinct operational and macroeconomic risks.
| Advantages | Disadvantages & Risks |
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Simplicity Priced, traded, and settled entirely in US dollars without requiring foreign exchange accounts. |
Currency Risk Even though traded in dollars, a drop in the foreign home country’s currency against the USD reduces the ADRS’s underlying value. |
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Convenience Bought and sold easily through standard domestic brokerage accounts just like regular domestic stocks. |
ADRs Pass-Through Fees Depositary banks charge minor custodial/management fees ($0.01 to $0.05 per share) usually deducted directly from dividends. |
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Dividend Distributions Dividends from foreign corporations are automatically converted and distributed to investors in US dollars. |
Foreign Tax Withholding Foreign home governments may deduct withholding taxes from dividend payouts before conversion, requiring tax credit claims. |
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Global Diversification Provides seamless international market exposure and access to foreign economic growth without cross-border friction. |
Political and Regulatory Risk Sudden policy shifts, local regulatory changes, political instability, or international sanctions in the home country can disrupt asset value. |
Tax Treatment of ADRs for Indian Residents
Dividend Taxation
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US Withholding Tax: Standard withholding is 30%, reduced to 25% for Indian residents under the India-US Double Taxation Avoidance Agreement (DTAA) upon submitting Form W-8BEN to the broker.
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Indian Taxation: Dividends are added to total taxable income and taxed at applicable slab rates.
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Foreign Tax Credit (FTC): Investors can claim a credit in India for US tax withheld by filing Form 67 before the ITR filing deadline.
Tax Collected at Source (TCS) on LRS Remittances
When aggregate LRS remittances cross ₹10 lakh in a financial year, authorised banks collect TCS at 20% for investment-related remittances. The TCS is not an additional tax cost. It is fully adjustable against your total income tax liability and can be claimed when filing your Income Tax Return (ITR).
Capital Gains Taxation & Schedule FA Reporting
Because ADRs trade on foreign exchanges, Indian tax laws classify them similarly to unlisted foreign shares rather than domestic listed equities:
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Short-Term Capital Gains (STCG): Held for 24 months or less, taxed at applicable income tax slab rates.
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Long-Term Capital Gains (LTCG): Held for more than 24 months, taxed at 12.5% without indexation. There is no ₹1.25 lakh annual exemption, nor is Securities Transaction Tax (STT) applicable.
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Schedule FA disclosure: Resident individuals holding foreign assets, such as ADRs, are legally required to report them under Schedule FA of their Indian ITR.
Role of SEBI and RBI In ADRs
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RBI and FEMA oversight: When an Indian company wants to list its shares overseas via ADRs, or when resident Indian investors wish to invest in foreign ADRs, the Reserve Bank of India (RBI) governs these cross-border money movements through the Foreign Exchange Management Act (FEMA) and the Liberalised Remittance Scheme (LRS).
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SEBI and Ministry of Finance Framework: Indian companies issuing ADRs must comply with the Depository Receipts Scheme, 2014, overseen by SEBI and the Ministry of Finance. This ensures that the underlying share issuance respects strict Indian sectoral foreign investment caps and disclosure standards before trading on US exchanges.
Conclusion
American Depositary Receipts (ADRs) serve as an efficient bridge for investors seeking global diversification by allowing them to trade foreign stocks directly on US exchanges in USD. While they offer simplified access to international markets, investors must carefully navigate associated nuances, including currency risk, custodial fees, and specific tax compliance requirements like LRS limits and Foreign Tax Credits.
