indian depository receipts meaning

Guri Bee

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17-10-2024

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Understanding Indian Depository Receipts (IDRs): A Gateway to Investing in India

The Indian economy is experiencing rapid growth, attracting investors worldwide. One way to access this burgeoning market is through Indian Depository Receipts (IDRs). But what exactly are IDRs, and how do they work?

What are Indian Depository Receipts (IDRs)?

Imagine you want to invest in a company listed on the New York Stock Exchange (NYSE), but you live in India. You can't directly buy shares on the NYSE. IDRs are like a bridge, allowing you to invest in foreign companies (mainly from the US, UK, and Europe) listed on foreign stock exchanges through the National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE).

How do IDRs work?

• Foreign company issues shares: A foreign company looking to raise capital in India issues shares to a Depository.
• Depository issues IDRs: The Depository issues IDRs against these foreign shares, which are then offered to Indian investors on the NSE and BSE.
• Investors buy IDRs: Indian investors can buy and sell IDRs on the stock exchange just like regular Indian stocks.
• Value linked to foreign shares: The value of an IDR is linked to the underlying foreign share price. As the foreign share price fluctuates, so does the IDR price.

Key Advantages of IDRs:

• Access to global companies: IDRs provide Indian investors with access to diverse global companies, diversifying their portfolios.
• Convenience: Trading IDRs is as simple as buying and selling any other stock on the Indian stock exchanges.
• Rupee denomination: IDRs are denominated in Indian rupees, eliminating the need for foreign currency conversion.

Example:

Let's say a company like Apple wants to tap into the Indian market. They issue shares to a Depository in India, which then issues IDRs to Indian investors. If an investor buys an IDR representing one share of Apple, they will benefit from any price appreciation in Apple's share price, even though they don't own the actual Apple shares directly.

Important considerations:

• Liquidity: IDRs might have lower liquidity compared to directly traded foreign shares.
• Fees: There might be additional fees involved, like depository charges and brokerage commissions.
• Currency risk: While IDRs are denominated in rupees, their value is still tied to the underlying foreign share price, which is subject to currency fluctuations.

Overall, IDRs are a valuable instrument for Indian investors looking to diversify their portfolios and gain exposure to global companies. However, it is important to understand the risks involved and carefully consider their suitability before investing.

Sources:

• https://www.nseindia.com/products/content/indian-depository-receipts.htm
• https://www.bseindia.com/markets/equities/Products/IndianDepositoryReceipts_IDR

Note: This article is for informational purposes only and not intended as financial advice. Consult with a qualified financial advisor before making any investment decisions.