Tata Motors recently announced its plans to delist its American Depository Receipts Shares (ADS) from the New York Stock Exchange (NYSE) from January 2023. Once the ADRs have been delisted from the NYSE, there would be no over-the-counter market trading of the ADRs in the United States.
Why? Tata Motors is terminating its ADR program because:
There has been a consistent drop in the number of ADS outstanding as a percentage of its outstanding ordinary shares.
TATA has witnessed a considerable increase in foreign investors moving liquidity into the equity stock markets.
It will cut Tata's administrative costs and simplify its financial reporting requirements.
Tata can go back to focus on trading its equity shares on the BSE and the NSE.
But what are ADRs?
For eg: Say Dharma Productions is a listed Indian company that wants to raise money by issuing their equity shares to foreign shareholders that are based in the US. They don't want to raise money from Indian stakeholders on the NSE and the BSE but are specifically looking for foreign investors so that they can receive Dollars.
Meanwhile, Mr Rahul Raichand's family (ie Ms Anjali, Ms Poo, Dadiji etc), who are foreign investors based in the US, have been desiring to invest in Dharma Productions but are unhappy since they can't do so at the moment. Since they cannot buy shares of Dharma Productions on the Indian stock exchange, they suggest the CEO to create an ADR in the US.
To raise funds through US Dollars, Dharma Productions will use the services of a particular bank that is present both in US and India. This bank is called the Overseas Depository Bank. Let's say Citi Bank is this Overseas Bank.
The CEO of Dharma Productions will issue its Indian shares to the Citi Bank, Mumbai branch, who will hold them in custody.
Citi Bank, Mumbai will then acknowledge this deposit and based on these shares, will ask Citi Bank, New York to issue another document called ''Indian Depository Receipts'' or IDRs. The IDRs will be issued based on the custody of Dharma Production's Indian shares that are kept as security with Citi Bank, Mumbai.
These IDRs will be now listed on the US Stock exchanges and US investors like Raichand, Anjali and Poo, can trade the IDRs of Dharma Productions. The value of Dharma's IDRs on the US Stock exchange will depend on the value of Dharma's shares in India.
The dollars spent by US investors will pass on to Citi Bank and after deducting its fees, Citi Bank, New York will transfer the dollars to Dharma Productions.