Section 2.1: American Depositary Receipts (ADRs)

Purpose of ADRs:
- Allow U.S. investors to buy shares of foreign companies in U.S. dollars.
- Simplifies investing in foreign companies without dealing with foreign currencies directly.
How ADRs Are Created:
- U.S. depository banks purchase the foreign company’s common shares.
- Shares are deposited in a foreign branch of the bank.
- Bank issues a receipt representing ownership of those shares.
- Each ADR may represent one or more shares of the foreign company.
Trading ADRs:
- Traded on U.S. stock exchanges or over-the-counter (OTC).
- Can be bought/sold just like U.S. common stock.
Dividends and Taxation:
- Dividends are denominated in U.S. dollars.
- Subject to withholding tax by the foreign country.
- Capital gains from trading ADRs are taxable in the U.S.
- Dividend amounts may fluctuate with currency exchange rates.
Risks:
- Currency risk – changes in exchange rates can affect dividend value.
- Political risk – foreign government actions can impact the investment.
Shareholder Rights:
- ADR holders may not receive voting rights.
- Depository banks are not required to pass preemptive rights or voting proxies to ADR holders.

ADR

To allow U.S. investors to purchase foreign company shares in U.S. dollars easily.
The bank buys foreign shares, deposits them in a foreign branch, and issues a receipt (ADR) representing those shares.
Yes, ADRs can be traded on U.S. exchanges or OTC like common stock.

Currency risk and political risk.
No, ADR holders are not guaranteed voting or preemptive rights.
Dividends may increase or decrease depending on changes in currency exchange rates.
Yes, any trading profits (capital gains) from ADRs are taxable in the U.S.