ADRs Explained: Ratios, Currency, Fees and the Underlying Foreign Share

ADRs Explained: Ratios, Currency, Fees and the Underlying Foreign Share

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Learning objective

Learn how an American Depositary Receipt maps to an underlying foreign share, how the ADR ratio and exchange rate shape its value, and which depositary fees, disclosure differences and liquidity risks to check before investing.

An American Depositary Receipt, or ADR, is a US-traded security representing an interest in shares of a non-US company held through a depositary bank. It trades and settles in US dollars, which can make a foreign company easier to access through a US brokerage account.

Convenient dollar trading does not turn the company into a US business or remove foreign-market risk. The ADR still reflects the underlying share, its home-market currency, corporate actions and the terms of the deposit agreement.

Step 1: map the depositary structure

The basic chain is:

1. ordinary shares of the foreign company are held by a depositary or local custodian;
2. the US depositary bank issues American Depositary Shares representing those underlying shares;
3. investors trade receipts evidencing the ADS interest on a US exchange or over-the-counter market;
4. dividends and other entitlements pass through the structure subject to conversion, tax, fees and the deposit agreement.

Market participants often use ADR and ADS interchangeably, although technically the ADR is the receipt and the ADS is the represented interest.

Step 2: find the ADR ratio

One ADR may represent:

• one ordinary share;
• several ordinary shares;
• a fraction of one ordinary share.

The ratio helps place the US price in a familiar trading range. It must be included when comparing the ADR with the home-market share.

A simplified theoretical value is:

ADR value = underlying share price × shares represented per ADR × exchange rate into US dollars

Use the exchange-rate convention carefully. Also account for different market hours, settlement, dividends, taxes, fees and temporary premium or discount.

Worked example

Assume one hypothetical ADR represents two ordinary shares. Each ordinary share trades at €30, and one euro buys $1.10.

Simplified ADR value:

2 × €30 × $1.10 per euro = $66.00

The foreign share then rises 5% to €31.50, while the euro weakens 4% against the dollar from $1.10 to $1.056.

Updated theoretical ADR value:

2 × €31.50 × $1.056 per euro = $66.528

The ADR's simplified return is approximately 0.8%, before costs:

(1 + 5%) × (1 − 4%) − 1 = 0.8%

The underlying share gained 5%, but the weaker euro offset most of that gain for the dollar-priced receipt. The ADR might trade away from $66.528 while the home market is closed, liquidity is thin or new information is reflected first in the US price.

Step 3: distinguish sponsored and unsponsored programmes

In a sponsored ADR, the foreign company enters into an agreement with the depositary bank. The programme can support recordkeeping, communications, dividend processing and, depending on its level, an exchange listing or capital raising.

An unsponsored ADR can be created without the foreign company's participation and normally trades over the counter. Investor communications, voting processes, liquidity and available US disclosure may differ.

The SEC groups ADR programmes into levels:

• Level 1: trading presence in the over-the-counter market; it may be unsponsored;
• Level 2: US national-exchange listing without raising capital through the programme;
• Level 3: exchange listing plus the ability to raise capital through a US offering.

Do not treat the Form F-6 deposit agreement as a substitute for company analysis. The SEC notes that Form F-6 primarily covers the contractual deposit terms; issuer financial information may appear in other filings or home-market disclosures.

Step 4: calculate depositary and dividend costs

The depositary agreement may permit:

• custody or depositary-services fees;
• issuance and cancellation fees;
• dividend-distribution charges;
• foreign-currency conversion costs;
• fees for voting, rights or other services;
• taxes and governmental charges.

The SEC says custody fees are often deducted from gross dividends before the net amount reaches ADR holders. If an ADR does not pay periodic dividends, the fee may instead pass through the settlement system and appear as a separate brokerage-account charge.

Read the Form F-6 fee schedule and broker disclosures. A small per-ADR fee can become material for a low-priced holding or a small dividend.

Step 5: trace the dividend from issuer to account

The foreign company may declare a dividend in its home currency. Before the investor receives dollars, the payment may be affected by:

• ADR ratio;
• foreign withholding tax;
• depositary fees;
• currency-conversion rate and spread;
• timing between the issuer payment and ADR distribution;
• local restrictions or extraordinary corporate-action rules.

Compare the gross foreign dividend, gross ADR-equivalent dividend and net cash credited. Dividend yields shown by different data vendors may use different stages of this chain.

Step 6: compare price and liquidity across markets

Professional participants can sometimes create or cancel ADRs against the underlying shares, which links the two prices. The connection is not frictionless. Conversion time, fees, market closures, foreign ownership limits, capital controls, settlement risk and short-sale constraints can allow a premium or discount to persist.

Check:

• volume and bid-offer spread in the ADR;
• home-market liquidity;
• whether both markets are open at the same time;
• the current ratio and any announced ratio change;
• corporate-action treatment;
• programme termination terms.

An OTC ADR can be less liquid and may provide less readily available information than an exchange-listed sponsored programme.

Step 7: keep the underlying risks

An ADR remains exposed to:

• the foreign company's business and governance;
• its home economy and political system;
• accounting and disclosure differences;
• exchange rates and currency controls;
• foreign-market holidays and settlement;
• depositary and custody arrangements;
• US delisting or ADR programme termination.

Dollar settlement simplifies the transaction interface. It does not eliminate these risks.

Common mistakes

• Ignoring the ADR-to-ordinary-share ratio.
• Comparing ADR and local prices without converting currency.
• Assuming dollar trading removes currency risk.
• Treating every ADR as sponsored and exchange-listed.
• Reading Form F-6 as if it contained the full issuer analysis.
• Forgetting custody fees deducted from dividends or charged separately.
• Comparing dividend yields before checking withholding and conversion.
• Assuming premiums or discounts close immediately while one market is shut.

Practical checklist

• Identify the ordinary share, home exchange and home currency.
• Confirm the current ADR ratio and programme type.
• Read the deposit agreement and Form F-6 fee schedule.
• Check issuer disclosures, including Form 20-F where applicable.
• Convert the underlying price using a labelled FX quote.
• Reconcile gross and net dividends after tax, conversion and fees.
• Compare liquidity, spreads and trading hours in both markets.
• Review voting, rights, corporate-action and termination procedures.
• Recalculate theoretical value after ratio or exchange-rate changes.

Sources

• Investor.gov: Investor Bulletin—American Depositary Receipts
• Investor.gov: American Depositary Receipts glossary
• SEC: Form F-6 eligibility and ADR structure

This tutorial was prepared with AI-assisted research and writing under The Money Man editorial workflow. It is educational information, not personalised investment, legal or tax advice. The example is hypothetical. ADR ratios, fees, tax, disclosures, liquidity and programme terms vary; verify current official documents before investing.