Lesson 5 of 6
What an ADR actually is
A receipt for shares held abroad, at a ratio the company sets. One ADS is ten Toyota shares, and the depositary charges up to 5 cents a year for holding it.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- An American depositary share is a receipt issued against shares held by a depositary bank abroad, at a ratio the arrangement sets.
- The ratio is chosen to put the receipt at a convenient dollar price, so one receipt is rarely one share.
- The depositary charges for holding it and for passing on dividends, and the schedule is printed in the annual report.
Buying a foreign company on a US exchange usually means buying a receipt rather than the share itself. The difference is mostly administrative, and the places it is not are worth knowing.
What one receipt represents
- One Toyota American depositary share10 underlying shares
- One Petrobras common ADS2 underlying shares
- One Petrobras preferred ADS2 underlying shares
How it works
A depositary bank holds the ordinary shares in the company's home market and issues receipts against them in the United States. Toyota's cover page states the arrangement in one line: each American depositary share represents ten shares of common stock. Its depositary is The Bank of New York Mellon.
The receipts trade in dollars on a US exchange, settle like a US security, and pass dividends through in dollars after conversion. As a holder you have an interest in the underlying shares through the depositary, which is a different legal position from holding the shares directly, and the deposit agreement sets out what that means for voting and for corporate actions.
Sponsored and unsponsored
A sponsored programme is set up with the company's involvement: it has a deposit agreement, the company files with the SEC, and the receipts can list on an exchange. Everything in this course is that kind.
An unsponsored programme is created by a bank without the company's participation. More than one can exist for the same company, the terms are the bank's, and the disclosure is whatever the company publishes at home. They trade over the counter and are a different object from an exchange-listed sponsored receipt.
The ratio is a share count problem
The ratio is chosen to put the receipt at a price American investors are used to, which is why one Toyota receipt is ten shares and one Petrobras receipt is two.
It also means every per-receipt figure is the per-share figure times the ratio. Earnings per share, dividends per share and book value per share all have to be multiplied before any of them can be compared with a receipt's price, and the mistake is silent: divide a receipt price by a per-share earnings figure and the resulting ratio is wrong by the ratio itself.
What it costs to hold
Five cents a year on a receipt is small against a price in the hundreds. Five cents on each cash distribution is a real bite out of a dividend, and the currency conversion is charged on top of it.
The same item of the same filing discloses that in fiscal 2026 the depositary paid the company, or paid third parties at its instruction, an aggregate of 980,058.75 dollars. That is the other side of the arrangement, and it is disclosed because it is a payment from the entity charging the holders to the company whose shares they hold.
Check yourself
If one receipt represents ten underlying shares, what must you do with a per-share earnings figure?
- Nothing: the figures are already per receipt
- Multiply it by ten before comparing it with the receipt's price
- Divide it by ten
Show the answer
Answer: B.
Every per-share figure has to be put on the same basis as the price you are dividing by, or the ratio is wrong by exactly the deposit ratio.What distinguishes a sponsored programme from an unsponsored one?
- Only the exchange it trades on
- The company's participation: a deposit agreement, SEC filings, and the ability to list on an exchange
- The currency the dividends are paid in
Show the answer
Answer: B.
An unsponsored programme is created by a bank on its own terms, can exist more than once for a company, and trades over the counter.Where is the running cost of holding a receipt disclosed?
- In the prospectus only
- Item 12.D of the annual report on Form 20-F
- It is not disclosed
Show the answer
Answer: B.
The fee schedule, including the annual service fee and the charge on each cash distribution, is printed there.Sources
- Toyota Motor Corporation, Form 20-F for the fiscal year ended 31 March 2026, filed 2026-06-10: the cover-page statement that each American depositary share represents ten shares, the depositary's identity, and the Item 12.D fee schedule and reimbursement disclosure.
- Petrobras, Form 20-F for the fiscal year ended 31 December 2025, filed 2026-04-09: the cover-page statement that each common and each preferred ADS represents two shares.
What this leaves out
- Ratios and fee schedules are set by each deposit arrangement and change. Both figures here are from one filing each.
- What a holder can and cannot do about voting is set by the deposit agreement, which is a separate document from the annual report.
- Unsponsored programmes are described here only in outline, and their terms are set by the bank rather than disclosed by the company.
- Nothing here is advice about any security.