Module: | MODULE A: INTERNATIONAL BANKING
Q202: Consider the following statements regarding the mechanics of Depository Receipts:
1. A Depository Receipt is a negotiable financial instrument issued by an overseas depository bank representing the underlying equity shares of a domestic Indian company.
2. American Depository Receipts are issued and traded exclusively in the United States, whereas Global Depository Receipts are issued in multiple international markets such as London or Luxembourg.
3. Investors holding Depository Receipts receive fixed interest payments similar to standard corporate debt bonds.
Which of the statements given above is or are correct?
2. American Depository Receipts are issued and traded exclusively in the United States, whereas Global Depository Receipts are issued in multiple international markets such as London or Luxembourg.
3. Investors holding Depository Receipts receive fixed interest payments similar to standard corporate debt bonds.
Which of the statements given above is or are correct?
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because only statements 1 and 2 are accurate.Structural Breakdown: An Indian company issues standard equity shares to a domestic custodian bank.
An overseas depository bank, such as a major bank in New York, then issues Depository Receipts backed by these shares to foreign investors.
Statements 1 and 2 accurately define this structure and the geographic distinction between American and Global variants.
Statement 3 is completely incorrect.
Because the underlying assets are equity shares, the investors receive variable dividends, not fixed interest, and they assume the equity risk of the company.
Historical Context: Indian technology companies spearheaded the use of American Depository Receipts in the late 1990s to tap into the massive liquidity of United States capital markets, boosting their global visibility and raising capital for international expansion.
Causal Reasoning: The causal rationale for utilizing this structure is regulatory arbitrage and investor convenience.
It allows United States retail and institutional investors to buy shares of Indian companies through their standard domestic brokerage accounts in US Dollars, without needing to register as foreign investors in India.