Wipro ADRs surge: What are American Depository Receipts? 6 things Indian investors should know

First, what are ADRs?

Imagine you live in the US and love an Indian company, let's say Wipro. You have reasons to believe it is going to do well and want to own a piece of it by buying its shares.

But there is a problem: Wipro shares are traded on Indian stock exchanges like the NSE and BSE, and are priced in Indian currency. You can't just log in to your trading app in the US and buy them easily.

But there's a clever solution. An American bank says, “Don’t worry, I will buy Wipro shares from India and keep them safe in my vault. Then I will issue you a special ticket that represents those shares, priced in the US dollars.

That special ticket is an ADR.

Think of it as a coupon from your favourite vada pav shop that represents one vada pav sitting in the kitchen. You hold the coupon, which can be bought and sold, while the vada pav stays put in the kitchen.

But, why would someone living in the US want to buy ADR of an Indian company?

Well, he can because ADRs allow him to invest in an Indian company he is very bullish on. Moreover, ADRs allow him to invest without dealing directly with the Indian stock markets.

Here’s the fun part: Indians sitting in Mumbai, Delhi, or any other city can also buy ADRs. However, the process is not as straightforward as buying shares of an Indian company through a regular trading app. You need to open an international brokerage account that provides access to the US market and comply with RBI regulations.

6 key points about ADRs

Hope you now understand the concept of ADRs. Read on for six key things about them:

ADRs allow Indian investors to gain exposure to global companies and are traded on the US stock exchanges. However, you are not directly buying the underlying shares. The actual shares are held by a depository bank, which issues ADRs against them.

Investment in ADRs is possible both ways. You can invest in ADRs while living in India or in the US. However, the investment iprocess differs in each case. For someone sitting in the US, it is straightforward, just as buying any share listed on the US exchanges. For someone in India, RBI limits come into play, and one also needs an international brokerage account.

ADRs can play the role of both a hedge and a currency bet in your portfolio simultaneously.

ADRs are priced in the US dollars. So, for someone investing from India, returns do not only depend on the ADR’s market performance but also on the USD/INR exchange rate. A weakening rupee can boost your ADR returns, while the opposite can happen if the rupee strengthens.

RBI and FEMA regulations apply to international investments.

Investing in ADRs by Indian residents is treated as investing in any foreign-listed instrument. Investors need to stay within the Liberalised Remittance Scheme (LRS) limit of USD 250,000 per financial year. Remittances above ₹7 lakh, including those under LRS, are subject to tax collected at source (TCS). So, you should always consult a CA or an expert for compliance.

Gains from ADRs are taxed as foreign equity in India and not as domestic shares. One can face two types of taxes when investing in ADRs from India:

• US taxes: If your ADR pays dividends, 25% of the dividend can be withheld for taxes in the US.

• Indian taxes: Dividends (after the US tax deduction) are added to your total income and taxed at slab rates. Long-term capital gains (LTCG) from ADRs are also taxed at 12.5% (after 24 months). Short-term gains are taxed at slab rates.

However, one can avoid double taxation through the India-US DTAA.

The price of an Indian company’s ADR and domestic shares can diverge. While they should theoretically track each other (after adjusting for the ADR ratio and exchange rate), they can diverge due to factors like different trading hours, liquidity differences, and sentiment. For instance, Wipro ADR surged nearly 19% in the US on Thursday, but on Friday, at the time of writing in India, Wipro shares were up only 1.63%.