Global Depository Receipts (GDR): Meaning, Features and Benefits

In today's connected world, companies often want to grow beyond their home country. One way to do this is by raising money from international investors. A useful tool for this is the Global Depository Receipt (GDR). It helps companies from countries like India get investment from abroad. In this blog, we'll break down what a GDR is, how it works, its features, benefits, and the risks involved, with clear examples and easy-to-understand language.

What Is Global Depository Receipt (GDR)?

A Global Depository Receipt is a tool that helps companies raise money from other countries. It represents a certain number of shares in a company and is traded on stock markets outside the company’s home country.

For example, an Indian company can issue shares in India, and then a foreign bank creates GDRs based on those shares. These GDRs are traded on international stock exchanges like the London Stock Exchange or the Luxembourg Stock Exchange. Foreign investors can then buy these GDRs instead of directly buying Indian shares.

GDRs make it easier for foreign investors to invest in companies from other countries. It also helps companies reach a wider group of investors.

How Do Global Depository Receipts Work?

Here’s how the process works in simple steps:

1. The company issues shares in its home country (for example, India).

2. A custodian bank in India holds those shares safely on behalf of a foreign depository bank.

3. The foreign bank issues GDRs based on those shares.

4. GDRs are listed on global stock exchanges.

5. Foreign investors buy and sell these GDRs.

Each GDR represents a fixed number of shares. Investors who hold GDRs receive dividends just like regular shareholders. However, GDR holders may or may not have voting rights, depending on the terms of the issue.

Features of Global Depository Receipts

GDRs have some important features that make them useful for both companies and investors:

• Traded on International Markets: GDRs are listed on stock exchanges outside the company’s home country.

• Issued in Foreign Currency: Usually in US dollars or euros.

• Transferable: They can be freely bought and sold like any other stock.

• Dividend Entitlement: Holders of GDRs get the same dividends as regular shareholders.

• Usually No Voting Rights: In most cases, GDR holders don’t get to vote in company matters.

• Represent One or More Shares: One GDR can represent multiple shares or even a fraction of a share.

• Secure Settlement: Trades are settled through safe systems like Euroclear or Clearstream.

GDR vs ADR – Key Differences

Let’s compare GDRs with another similar instrument called American Depository Receipts (ADRs):

Benefits of Global Depository Receipts

GDRs are helpful for both companies and investors. Here’s how:

For Companies:

• Access to Global Capital: Companies can raise money from foreign investors.

• Increased Visibility: Listing abroad can boost brand value and global trust.

• More Investors: Companies can reach investors who don’t invest in their local stock markets.

• Currency Diversification: Funds raised are often in strong foreign currencies, which can be helpful for international expenses.

For Investors:

• Easy Access to Foreign Companies: Investors can invest in companies from other countries without worrying about foreign market rules.

• Traded Like Stocks: GDRs can be bought and sold easily on major global exchanges.

• Regular Income: Investors can receive dividends declared by the company.

• Diversification: GDRs allow investors to diversify their portfolios across countries and sectors.

Example of a Global Depositary Receipt

Let’s understand this with a simple example:

Imagine that XYZ Ltd., an Indian technology company, wants to raise money in Europe. It issues new shares in India, which are held by a custodian bank. A European bank then creates GDRs that represent those shares. These GDRs are listed on the London Stock Exchange. Now, a French investor can buy 1,000 GDRs, which represent 2,000 shares of XYZ Ltd. The investor receives dividends when XYZ Ltd. announces them and can sell the GDRs on the exchange.

Risks and Limitations of GDRs

Even though GDRs offer many benefits, they also come with risks:

• Currency Risk: If the value of the foreign currency drops, investors may lose money when converting their returns.

• Regulatory Risk: Companies must follow rules in both their home country and the country where the GDR is issued.

• Lower Liquidity: Some GDRs are not traded very often, making them harder to sell quickly.

• No Control: Most GDR holders can’t vote on company decisions.

• Political and Economic Risk: Events in the company’s home country can affect its performance and the value of the GDR.

Additional Considerations

• Costs: Investors may have to pay fees like transaction charges, taxes, or service charges to brokers or banks.

• Tax Implications: Tax treatment may vary based on the investor's country and the GDR issuer’s country.

• Transparency: Investors should review the company’s financials and reports before investing.

Conclusion

Global Depository Receipts are a smart way for companies to raise money globally and for investors to diversify internationally. They offer flexibility, access to foreign markets, and regular returns. However, like all investments, GDRs come with risks. So, it’s important to understand the terms, do your research, and consult with professionals if needed.

With proper understanding, GDRs can be a useful part of a company’s global strategy and an investor’s global portfolio.