- The Washington Times - Wednesday, May 4, 2005

Q: What’s an ADR?

A: In the financial world, ADR is the abbreviation for American Depositary Receipt, a dollar-denominated negotiable certificate that represents the stock of a foreign company traded on a U.S. exchange or market. ADRs make it more convenient for Americans to invest in businesses abroad, and allow foreign companies to raise capital in the U.S. market. Among the advantages for investors, ADRs express price in dollars, assure timely dividend distributions and are generally less cumbersome than buying stock directly through a foreign exchange.

If you’ve ever invested in a foreign stock, such as Nokia Corp., Sony Corp. or Toyota Motor Co., you’ve purchased an ADR. This receipt is the physical certificate of ownership in one or more American Depositary Shares, or ADS, which represent the foreign shares of a company held on deposit by a custodian bank in the company’s home country. The terms ADR and ADS are can be used interchangeably.

The first ADR was created in 1927 by J.P. Morgan, to allow Americans to invest in the British retailer Selfridge’s. Now there are more than 2,100 ADRs traded on various U.S. markets; JPMorgan Chase Bank remains one of the biggest administrators of ADR programs, along with the Bank of New York. The most widely held ADR is British Petroleum PLC, followed by Royal Dutch Petroleum Co., Vodafone Group PLC and GlaxoSmithKline PLC.

The majority of foreign stock available in the United States are level I ADRs, meaning they are traded over the counter (OTC), on the bulletin board. Level I ADR status is an easy and relatively cheap way for a smaller foreign company to build a U.S. presence and measure interest in its stock. ADRs that trade OTC, or on pink sheets, are usually exempt from the traditional reporting requirements of the Securities and Exchange Commission.

Foreign companies can get greater visibility in U.S. markets by moving to level II status, which involves being quoted on the Nasdaq Composite Index, or listed on one of the U.S. securities exchanges, such as the New York Stock Exchange or the American Stock Exchange. At this level and above, companies are subject to all SEC filing and reporting requirements, just like domestic stock issuers.

In highest level of ADRs, a foreign company floats a public offering of its stock in the United States and gets listed on one of the exchanges or the Nasdaq Stock Market. Level III ADRs offer substantial benefits for issuers, allowing them to raise more capital and achieve much greater visibility in the global market.

To small investors, there’s no difference between level II and level III ADRs; the designation merely signifies the way a company comes to market. ADRs at these levels tend to be larger, more established companies. Some level II names include Sony, BP, Novartis AG, Cadbury Schweppes PLC, Unilever NV and AB Volvo. Some level III companies include Banco Santander Central Hispano SA, BT Group PLC, Telecom Italia SPA and Novo-Nordisk A/S.


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