Indian companies listed on US exchanges

A number of Indian companies trade on US exchanges, mostly through American Depositary Receipts. Understanding what an ADR is explains both why they exist and why the arithmetic between the US price and the Indian price is rarely as simple as a currency conversion.

What an American Depositary Receipt is

A depositary bank holds shares of the Indian company and issues receipts against them that trade on a US exchange in dollars. Each receipt represents a defined number of underlying shares, the ratio being set when the programme is created and varying between companies.

A holder of the receipt has economic exposure to the underlying shares. What they hold is the receipt, not the share itself, and the rights attached differ from those of a direct shareholder.

The point of the structure is access. A US institution that cannot easily hold Indian listed securities can hold a dollar denominated receipt that settles in its own market.

Which companies

The most established Indian ADR programmes have historically been in information technology and banking, with Infosys and Wipro among the longest running, alongside major private sector banks and a pharmaceutical company or two. Separately, some companies with Indian operations are incorporated abroad and listed directly on a US exchange rather than through a depositary receipt, which is a different structure entirely.

Programmes are created, resized and terminated, and companies delist. Any list in an article goes out of date, so check the current position on the exchange rather than relying on one.

Why the price gap exists

An ADR and its underlying Indian share should be worth the same after adjusting for the ratio and the exchange rate. In practice they differ, sometimes by several per cent, because of a constraint on arbitrage.

Converting between the two involves the depositary, cross border settlement and compliance with the rules on foreign holding of Indian shares. When conversion is constrained, the mechanism that would close a gap cannot operate, and the ADR can trade at a persistent premium or discount. Historically some Indian ADRs have traded at wide premiums for extended periods for exactly this reason.

So an ADR price is not a live translation of the Indian price. It is a separate market in a related instrument.

The question this raises for an Indian resident, which needs advice

Whether a resident individual may purchase an ADR of an Indian company using their LRS allowance is not a straightforward question, and this article does not answer it.

The Overseas Investment Rules 2022 contain a provision restricting investment into a foreign entity that has invested or invests into India, in the context of layered structures. An ADR presents an unusual case, because the instrument is foreign while the underlying company is Indian, and the transaction is portfolio investment on an exchange rather than a commitment to a foreign entity.

Anyone considering this should take specific advice on their own facts from a professional who deals with FEMA matters, and should ask their bank and their platform how the remittance would be characterised, before remitting rather than afterwards. It is not a question to resolve by inference from a general article, including this one.

What is clear regardless

• An ADR held by a resident and ordinarily resident is a foreign asset and must be disclosed in Schedule FA
• Gains are taxable in India, with the twenty four month threshold applying since the instrument is not listed in India
• Dividends face US withholding and are then taxable in India, with credit available on filing Form 67 within time
• The premium or discount to the underlying share is a real component of your return