What is GDR (Global Depository Receipt) and the working of GDRs?

GDR (Global Depository Receipts) has become a popular way for companies to raise capital and increase their visibility in international markets. GDRs allow companies to raise funds in a foreign currency without having to comply with the regulatory requirements of that country. In this article, we’ll take a closer look at GDRs, their features, and how they work.

Quick Look

Global Depository Receipt (GDR) is a financial instrument that allows investors to hold shares of foreign companies in their own country without the need for physical delivery of the shares. It is essentially a certificate issued by a bank that represents a certain number of shares of a foreign company. GDR (Global Depository Receipts) are used as a means of raising capital in international markets and provide investors with exposure to global companies. Let us now, move on to discuss about Global Depository Receipt in great detail.

What are Global Depository Receipts?

A GDR (Global Depository Receipts) is a certificate issued by a depository bank representing shares of a foreign company’s stock. These certificates are traded on international stock exchanges, and investors can purchase them in a foreign currency. GDRs are a popular way for companies to raise capital in international markets without having to comply with the regulatory requirements of each country.

Features of Global Depository Receipts

GDRs are similar to American Depositary Receipts (ADRs) but are issued outside the United States. They allow companies to raise capital in a foreign currency, without having to comply with the regulatory requirements of the foreign market. GDRs are also negotiable instruments that can be traded on international stock exchanges.

GDRs are issued by depository banks, which hold the underlying shares on behalf of the GDR holders. These depository banks issue GDRs in the form of negotiable certificates, which are traded on international stock exchanges. GDRs are usually denominated in U.S. dollars or euros and are settled in these currencies.

How do Global Depository Receipts work?

A GDR is issued by a bank on behalf of a foreign company. The bank purchases shares of the foreign company’s stock and holds them in custody. The bank then issues GDRs that represent ownership of the shares held in custody. The GDRs are denominated in a foreign currency and trade on international stock exchanges.

Investors can purchase GDRs just like they would purchase shares of a stock. When an investor purchases a GDR, they are purchasing a certificate that represents ownership in a foreign company’s shares. The investor does not actually own the shares directly, but they are entitled to any dividends or capital gains associated with the shares.

What are the risks associated with Global Depository Receipts?

While GDRs offer several benefits to companies, there are also some risks that investors should be aware of before investing. Some of the key risks include:

• Currency risk: GDRs are denominated in a currency other than the company’s domestic currency, which can create currency risk for investors.
• Regulatory risk: GDRs are subject to the laws and regulations of the country where they are issued, which can vary significantly from the laws and regulations in the company’s home country.
• Liquidity risk: GDRs can be illiquid, which can make it difficult for investors to buy or sell their shares.
• Political risk: GDRs are subject to political risks in the country where they are issued, which can include changes in government policies or political instability. 

Advantages of Global Depository Receipts

GDRs have several advantages for companies looking to raise capital in international markets which are as follows:

• Access to Global Capital Markets: GDRs offer companies an opportunity to raise capital from international investors by tapping into the global capital markets. With the issuance of GDRs, companies can access a much wider investor base, which increases their chances of raising capital at a lower cost.

• Diversification of Investor Base: GDRs offer companies the opportunity to diversify their investor base, which helps reduce their reliance on domestic investors. This diversification can help reduce risks associated with domestic economic, political, and regulatory changes.

• Access to Liquidity: By listing GDRs on international exchanges, companies can gain access to a much larger pool of liquidity, which can help improve the trading liquidity of their shares. This can result in more efficient price discovery and increased investor interest.

• Cost-Effective Alternative to Listing Shares: Listing shares on international exchanges can be a costly and time-consuming process. GDRs provide a cost-effective alternative for companies to access global capital markets without the need to list their shares directly on international exchanges.

• Exposure to International Investors: By issuing GDRs, companies can gain exposure to international investors who may have a better understanding of the company’s operations in their home country. This can result in increased demand for the company’s shares and higher share prices.

Disadvantages of Global Depository Receipts

While GDRs offer several advantages to companies, there are also some disadvantages that should be taken into account before investing in them.

One of the main disadvantages of GDRs is that they can be subject to political risk. Companies that issue GDRs may operate in countries with unstable political environments, which can lead to changes in regulations or other political events that can affect the value of the GDR.

GDRs can also be subject to currency risk. While GDRs are denominated in a foreign currency, they are still subject to currency fluctuations. If the currency in which the GDR is denominated falls against the investor’s home currency, the value of the GDR will decrease.

Another disadvantage of GDRs is that they may not provide the same level of shareholder rights as investing directly in a company’s shares. GDRs are held in custody by a bank, which means that investors may not have the same voting rights or other shareholder rights as they would if they held the shares directly.

Important points to keep in mind regarding Global Depository Receipts

The following are the points to be kept in mind regarding GDRs:

• GDRs are subject to currency risk: GDRs are denominated in a currency other than the issuing company’s currency. As a result, investors who buy GDRs are exposed to currency risk, which can impact their returns.
• GDRs are subject to foreign exchange risk: In addition to currency risk, GDRs are also subject to foreign exchange risk. This is because the value of the GDR will be affected by changes in the exchange rate between the currency in which the GDR is denominated and the investor’s home currency.
• GDRs are subject to market risk: Like any other stock, the value of GDRs can be impacted by changes in the market. Factors such as economic conditions, company performance, and geopolitical events can all impact the value of GDRs.
• GDRs may have different rights than regular shares: GDRs may have different rights than the underlying shares, such as voting rights or dividend rights. It is important for investors to understand the rights associated with the GDR before investing.
• GDRs may have different fees and charges: Investors should be aware of the fees and charges associated with buying and selling GDRs. These can include fees charged by the depository bank, as well as fees charged by the stock exchange.

Conclusion

In conclusion, GDRs are a popular way for companies to raise capital in international markets. They allow companies to raise funds in a foreign currency without having to comply with the regulatory requirements of that country. GDRs are issued by depository banks and are traded on international stock exchanges. They have several advantages, such as providing access to a wider pool of investors and increasing visibility in international markets. However, GDRs also have some disadvantages, such as being expensive to issue and exposing companies to foreign currency risk.

Connect with the experts at Legal Window in case you face any difficulty in understanding the concept of GDR, you may reach us at 072407-51000 or by email at admin@legalwindow.in. Legal Window also, provides Indian Subsidiary Registration for foreigners wishing to establish a foreign company in India.