International Depository Receipt (IDR)
Candlefocus EditorThe IDR is issued by a local or foreign depository bank, which purchases the shares from the company and then issues the appropriate number of receipts that correspond to each share. By doing this, the bank acts as the custodian of the shares held by the holders of the depository receipts. The depository bank may also provide the holders of the IDR with other services such as dividend payments and the exercise of rights to vote on corporate matters.
For the issuing company, issuing IDRs makes it easier for foreign investors to invest in their shares, since it overcomes the difficulties in trading on a foreign exchange. As well, the IDR can provide an additional source of revenue for the company in the form of depositary fees.
For investors, IDRs provide a number of benefits. Some of these benefits include the convenience of investing in shares from different countries from the investor’s home country, access to high growth markets, and possibly a lower cost of trading because two parties are needed to buy and sell the IDR. Furthermore, IDRs minimize the currency risk associated with buying foreign shares because investors can choose to buy IDRs denominated in their local currency.
While IDRs are an attractive option for investors, there are some risks associated with them. One such risk is the liquidity risk, as IDRs are usually not as liquid as direct investments in the company stock on its home exchange. As well, there is the risk of devaluation of the shares underlying the IDR, in the event that the issuing company performs poorly.
Overall, IDRs are a useful way for companies to raise capital and offer foreign investors an alternative to direct investing in the market of a foreign company. Although they bring a number of advantages, investors should be aware of the risks involved before investing in IDRs.