Sponsored ADR
Categories: Stocks
You work for a large American company that wants to invest abroad. U.S. markets are facing slow growth, because they’re already very developed. Late stage capitalism, ehhh. They want you to help them tap into capital markets abroad, i.e. places with more room for growth, like emerging markets in India.
But...there’s a catch. They don’t want to deal in foreign currencies. They’d rather it be simple, not complicated.
What do you do? Check out sponsored ADRs, a.k.a. sponsored American Depositary Shares (ADRs). Sponsored ADRs are shares offered by foreign companies on U.S. exchanges. Perf.
Banks work with foreign companies to create sponsored ADRs. They’re sponsored, since the foreign company has their equity as the underlying asset. Sponsored ADRs are listed on major exchanges, which is a win-win: foreign companies get access to U.S. capital, and U.S. capitalists get access to high-growth markets. Plus, they’re paid out in U.S. dollars. Since they’re listed on legit exchanges, you know sponsored ADRs have had to jump through all kinds of hoops, like complying with SEC rules and regulations.
To contrast, unsponsored ADRs are only OTC, and can be made without the foreign company’s permission or knowledge. Both kinds of ADRs, however, come with high risk. There’s the company itself, as well as potential changes in exchange rates, that create potential risk.
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