Looking for the answer to the question below related to Financial Management ?
In ADR and GDR process, _______ issues the depository Receipts in Foreign Markets.
|.A. Custodian bank
B. Depository Bank
C. Issuing Company
D. Lead manager
The Correct Answer Is:
- a) One
The Correct Answer Is: A. Custodian Bank
Why Option A (Custodian Bank) is Correct:
In the process of issuing American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), it is the custodian bank that plays a critical role in the issuance of these depository receipts in foreign markets.
1. Custodian Bank’s Role:
A custodian bank is responsible for holding and safeguarding the underlying shares of the issuing company (which could be a foreign company) and then issuing ADRs or GDRs against those shares. ADRs and GDRs represent ownership of these underlying shares, allowing investors in foreign markets to trade them easily without directly owning the shares.
2. Custodial Services:
The term “custodian” itself implies the safekeeping of assets. Custodian banks act as the custodian of the shares and are responsible for maintaining accurate records of who owns the depository receipts. They also manage the logistics of ADR and GDR trading in foreign markets.
3. Depositary Receipt Issuance:
When a foreign company wishes to have its shares traded in international markets, it usually engages a custodian bank. The custodian bank takes the company’s shares and issues ADRs or GDRs that can be traded on foreign stock exchanges, making it easier for international investors to invest in the company’s shares.
4. Cross-Border Trading:
ADRs and GDRs facilitate cross-border trading because they are denominated in a foreign currency and are subject to the rules and regulations of the foreign market. The custodian bank manages the logistics of these transactions.
Why Other Options are Not Correct:
B. Depository Bank:
While the term “depository” may sound related to depositary receipts, it is the custodian bank, not the depository bank, that primarily handles the issuance of ADRs and GDRs. The depository bank is generally more focused on providing various depository services and may not necessarily be involved in the issuance process.
C. Issuing Company:
The issuing company is the entity whose shares are being represented by the ADRs or GDRs, but the company typically engages a custodian bank to handle the logistics of issuing these receipts in foreign markets. The issuing company does not directly issue ADRs or GDRs to the international market.
D. Lead Manager:
A lead manager is usually associated with underwriting and managing the issuance of securities in the primary market. In the case of ADRs and GDRs, the primary market activity primarily involves the issuing company and the custodian bank, with the lead manager playing a role in the initial public offering (IPO) of these receipts, but it is not directly responsible for issuing them in foreign markets.
In conclusion, the correct answer is A. Custodian Bank because it is the custodian bank’s responsibility to issue ADRs and GDRs in foreign markets. These banks play a pivotal role in the process by holding and safeguarding the underlying shares and facilitating the trading of depository receipts on international stock exchanges.
The other options are not correct because they do not directly handle the issuance of ADRs and GDRs in foreign markets, and their roles in the process are distinct.
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