Converting an American Depositary Receipt into the underlying ordinary shares means asking the depositary bank to cancel the ADR and instruct its foreign custodian to release the equivalent shares into an account you control in the issuer’s home market. Budget roughly $0.05 per ADR for the cancellation fee, about $17.50 for the cable fee, plus charges from your U.S. broker and foreign custodian. Settlement runs anywhere from two business days to two weeks depending on the market. And expect new U.S. reporting obligations the moment those shares land in a foreign account.
What You Need Before You Start
The single biggest prerequisite is a foreign brokerage or custody account that can hold and settle ordinary shares in the issuer’s home market. Your U.S. broker almost certainly cannot hold shares that settle through a foreign clearing system. You need either a broker that operates in the target country or a global custodian with multi-market settlement. Opening one can take days or weeks, so start there.
Some markets add their own account requirements. Indian shares, for example, must be received into a specific DR-Type DMAT account rather than a standard demat account.1Citi Depositary Receipts. Depositary Flow – Process for ADS Cancellation Confirm with the foreign custodian that the account is set up to receive the specific security before you send any instructions.
Next, work out the share math. Each ADR represents a set number of ordinary shares under the program’s ADR-to-share ratio. A 1:1 ratio gives you one ordinary share per ADR; other programs use ratios like 1:10 or a fraction of a share per ADR. If the conversion produces a fractional share, the depositary bank sells the fractional portion and sends you cash instead.
Then prepare the Letter of Instruction for your U.S. broker. It needs to specify the number of ADRs to cancel and the full delivery details for the ordinary shares: the foreign custodian’s name, your account number there, and the clearing codes for the local market. Mismatched instructions are the most common cause of failed deliveries, and some depositary banks charge additional fees to fix them. Your broker may also require a Medallion Signature Guarantee on the instruction, particularly for larger conversions or transfers to accounts in a different name. Ask about that upfront rather than after you’ve signed.
Your right to withdraw the deposited shares comes from the ADR registration itself. Under SEC rules, the holder of an ADR registered on Form F-6 is entitled to withdraw the deposited securities at any time, subject only to temporary delays for things like dividend record dates or transfer book closings, and subject to applicable fees and taxes.2eCFR. 17 CFR 239.36 – Form F-6, for Registration Under the Securities Act of 1933 That applies to both sponsored and unsponsored programs.
The Cancellation Process
Once the Letter of Instruction is in your U.S. broker’s hands with the right delivery details, the mechanics run through three stages.
Your broker transfers the ADRs electronically through the Depository Trust Company to the depositary bank’s designated DTC participant account. This is a book-entry move; no paper changes hands. Your broker needs the depositary bank’s DTC participant number to route the delivery correctly.
The depositary bank then receives and cancels the ADRs, removing them from DTC, and instructs its local custodian in the foreign market to release the equivalent number of ordinary shares based on the ADR-to-share ratio.1Citi Depositary Receipts. Depositary Flow – Process for ADS Cancellation
Finally, the local custodian delivers the shares through the local clearing system to the foreign account you named. The conversion is complete when the ordinary shares are visible and tradable in that account.
How Long It Takes
The U.S. leg settles T+1, the next business day after the trade, following the SEC’s move to T+1 settlement in May 2024.3FINRA. Understanding Settlement Cycles Total time depends on the foreign leg, which follows the home market’s conventions. Many major markets also settle T+1 or T+2, so a clean conversion can complete in two to three business days.
Plan for longer. Depositary bank cut-off times, time zone gaps, and local market holidays add friction. If the foreign market is closed when the depositary processes the cancellation, the local delivery waits until the next open day. Conversions in less liquid markets or markets with manual registration can take one to two weeks. The single most common cause of delay is a mismatch between your instruction and the account details the foreign custodian has on file, so monitor status with both sides once instructions are submitted.
Fees and Costs
The depositary bank charges a cancellation fee of up to $0.05 per ADR, plus a cable fee of around $17.50 per transaction.4U.S. Securities and Exchange Commission. Notice of ADR Termination – Pixie Dust Technologies, Inc. Some banks round up the ADR count to the nearest hundred when calculating the cancellation fee. Because part of the cost is fixed, small positions carry a much heavier percentage cost than large ones.
Your U.S. broker may add its own processing fee for the DTC transfer and instruction handling. The foreign custodian will charge for receiving the shares and typically levies ongoing custody fees to hold them. Get a written fee schedule from both sides before you submit anything; the numbers vary significantly by market.
Currency Exposure and FX Pricing
An ADR wraps the underlying share in a U.S. dollar-denominated certificate. The moment you cancel and receive ordinary shares, you step outside that wrapper. From that point on, the value of your position moves with the foreign currency as well as the share price, and any eventual sale will reflect both.
If you need currency conversion as part of the transaction, the depositary bank’s FX pricing is not designed to be competitive. The bank acts as principal counterparty on conversions, not as your agent, and does not commit to the best available rate. The FX spread on cash distributions in sponsored programs is capped at 20 basis points, but this cap is not represented as a market-best rate.5Citi Depositary Receipts. Foreign Exchange Pricing Disclosure – Depositary Receipt Services
Foreign Transaction Taxes
Some jurisdictions impose transaction taxes or stamp duties on shares moving into or out of a depositary receipt program. France applies a 0.2% financial transaction tax to acquisitions of shares in large French companies, and ADR transactions fall within its scope. The United Kingdom applies stamp duty reserve tax to certain UK share transfers, which can reach 1.5% on transfers into depositary receipt systems. The applicable rate and direction depend on the issuer’s home country, so check with your broker or custodian for the specific market before converting.
U.S. Tax Treatment
Converting an ADR into the underlying ordinary shares is generally not a taxable event for U.S. federal income tax purposes. The IRS treats the conversion as a change in the form of your investment, not a sale or exchange. You do not recognize gain or loss at conversion, and your original cost basis in the ADRs carries over to the ordinary shares you receive. If the depositary bank pays you cash in lieu of a fractional share, that small payment can be a taxable capital gain.
Dividend treatment shifts once you hold shares directly. The issuer’s home country will likely withhold tax on dividends at its domestic rate, commonly between 15% and 30% depending on the country and any applicable tax treaty. Withholding also happens on ADR dividends, but as a direct shareholder you may need to manage the treaty relief paperwork yourself rather than relying on the depositary bank.
You can generally offset foreign withholding against your U.S. tax bill by claiming the Foreign Tax Credit on IRS Form 1116.6Internal Revenue Service. Foreign Tax Credit The credit is capped at the U.S. tax attributable to your foreign-source income, so it will not always cover the full withholding, but it prevents outright double taxation in most cases.
Foreign Account Reporting You Now Owe
This is the part that catches investors off guard. Holding ordinary shares through a foreign custody account can trigger U.S. reporting requirements that never applied when you held ADRs through a U.S. broker. Penalties are severe and ignorance is not a defense.
FBAR (FinCEN Form 114)
If the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the calendar year, you must file a Report of Foreign Bank and Financial Accounts. The foreign brokerage or custody account holding your ordinary shares counts. The FBAR is filed electronically with FinCEN, not with your tax return, and is due April 15 with an automatic extension to October 15.7Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)
Penalties are disproportionate to the paperwork. A non-willful violation carries a penalty of up to $10,000 per account per year. A willful violation, which courts have read broadly to include reckless disregard, carries a penalty of up to 50% of the account balance or $100,000, whichever is greater.8Office of the Law Revision Counsel. 31 USC 5321 – Civil Penalties Converting a sizeable ADR position into a new foreign account can push you across the $10,000 threshold on day one.
Form 8938 (FATCA)
Separately, the Foreign Account Tax Compliance Act requires you to report specified foreign financial assets, including shares held in foreign accounts, on IRS Form 8938 when they exceed certain thresholds. For unmarried taxpayers living in the U.S., the requirement begins when total foreign assets exceed $50,000 on the last day of the tax year or $75,000 at any point during the year. For married taxpayers filing jointly, the thresholds are $100,000 and $150,000 respectively.9Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets Form 8938 is filed with your annual tax return.
Both filings can apply at the same time. They serve different agencies and use different thresholds, so one does not substitute for the other. If a conversion is worth doing after fees, it is very likely large enough to trigger at least the FBAR.
If the ADR Program Is Being Terminated
A foreign issuer sometimes terminates its ADR program voluntarily, often after delisting from a U.S. exchange. The depositary bank notifies holders and sets a deadline for voluntary cancellation. The company files a Form 25 with the SEC, and delisting typically takes effect ten days after that filing.
Not every delisting ends the ADR. A company can downgrade from a listed program to an unlisted Level I program that trades over the counter. Your ADRs continue to exist in that case, trading on the OTC market with lower liquidity, and you can still convert to ordinary shares at any time.
If the program is fully terminated and you miss the deadline, the depositary bank will eventually sell the underlying shares in the foreign market and remit the net cash to remaining holders after cancellation fees, cable charges, and any applicable taxes. You lose control of the timing and price, and the forced sale is a taxable event. If a termination notice arrives, submit your cancellation instruction well before the deadline rather than letting the depositary bank sell for you.