Global Depository Receipts (GDR)

In an interconnected global economy, companies often seek access to international capital markets to fuel expansion, reduce reliance on domestic investors, and achieve greater liquidity. Global Depository Receipts (GDRs) are a vital instrument in achieving these objectives, enabling foreign companies to raise capital from international investors without directly listing on a foreign stock exchange. 

In this article, we will understand what Global Depository Receipts are, their meaning, characteristics, advantages, disadvantages, examples, and comparisons to other depository receipts.

What Is a Global Depository Receipt?

GDR Full Form stands for Global Depository Receipt, a type of financial instrument issued by a bank representing shares in a foreign company. GDRs allow investors to buy shares in foreign companies in their local currency or a globally recognised currency like the U.S. dollar, traded on international exchanges such as the London and Luxembourg stock exchanges. GDRs enable companies to access a more diverse pool of investors, improve liquidity, and potentially increase their valuation by trading in established global markets.

These instruments are especially popular with emerging-market companies aiming to diversify their investor base beyond domestic boundaries. GDRs benefit both companies, who gain access to more capital, and investors, who get the opportunity to invest in foreign entities without navigating complex foreign stock markets.

Example of Global Depository Receipts

An example of a successful GDR issuance is Infosys Limited. In 2013, Infosys issued 30 million GDRs on the Luxembourg Stock Exchange. Each GDR represented one share of Infosys, with JP Morgan Chase Bank acting as the issuing bank. The GDR issuance raised $438 million and provided Infosys with access to international investors without directly listing on a foreign stock exchange. This strategy helped Infosys broaden its investor base, increase liquidity, and gain exposure to a global audience.

Several other Indian companies have recently issued GDRs to tap into global capital markets. Notable examples include:

• Axis Bank Ltd.
• GAIL (India) Ltd.
• Larsen & Toubro Ltd.
• Mahindra & Mahindra Ltd.
• Reliance Industries Ltd.
• State Bank of India

Global Depository Receipts Mechanism

The term “Global Depository Receipt” implies a depository bank’s role in issuing these instruments on behalf of a foreign company. When a company wishes to issue GDRs, it typically collaborates with a depository bank. The process involves:

1. Buying the underlying shares: The depository bank purchases a specified number of the foreign company’s shares.
2. Issuing GDRs: The bank issues GDRs to represent ownership of these shares.
3. Custody and conversion: The underlying shares are held by the bank, while the GDRs are available for trading. GDR holders can convert them into the actual underlying shares if desired.

Features of a GDR

A Global Depository Receipt combines several important features that attract both companies and investors:

1. Currency denomination: Often in U.S. dollars or euros, making it accessible to a global audience.
2. Issuer intermediary: Issued by financial institutions on behalf of foreign companies.
3. Underlying shareholding: Represents ownership in a foreign company, with shares held by a custodian bank.
4. Dividend distribution: GDR holders receive dividends from the underlying company’s shares.
5. Conversion flexibility: Convertible into the actual shares it represents.
6. Regulatory compliance: Adheres to regulations in both the home and foreign countries.
7. Electronic and transferable: Can be held electronically and transferred among investors easily.
8. Limited voting: Voting rights are often restricted, as underlying shares are held by the depository.

Advantages of Global Depository Receipts

1. Access to international capital: GDRs allow companies to reach international investors without a direct foreign listing, expanding their capital base.
2. Improved liquidity: International exchange listings can improve liquidity, making shares more accessible and tradable for global investors.
3. Diversification of investor base: GDRs enable companies to tap into a diverse pool of investors, reducing reliance on domestic funding sources.
4. Cost-effective capital raising: Issuing GDRs can be less expensive than listing directly on a foreign stock exchange.
5. Brand building: An international presence through GDRs can enhance a company’s global brand and credibility.
6. Currency hedging: Investors can benefit from currency hedging if GDRs are issued in widely traded currencies.
7. Increased valuation potential: Listing on an international exchange may lead to higher valuations due to access to a larger, often more favourable market.
8. Enhanced reputation: A GDR listing signals commitment to global growth, making companies more appealing to international investors.

Disadvantages of Global Depository Receipts

Despite their many advantages, GDRs have certain drawbacks:

1. Currency risk: GDRs are exposed to currency fluctuations, which can negatively impact their value.
2. Regulatory compliance costs: Companies must comply with regulations in multiple jurisdictions, leading to higher compliance costs.
3. Liquidity risks: GDRs may not be as liquid as domestic shares, resulting in a wider bid-ask spread and potential difficulty in buying or selling shares.
4. Limited voting rights: GDR holders often do not have voting rights, limiting their control over company decisions.
5. Cost of issuance: Issuing GDRs may be more costly than raising capital domestically, due to additional fees and compliance requirements.
6. Limited market access: Certain markets may restrict GDR availability to specific investor classes, reducing potential demand.
7. Country risk: GDR holders face risks associated with the issuing country’s political, economic, and regulatory environment.
8. Taxation: GDRs may attract double taxation in the issuing and trading countries, impacting returns for investors.

GDRs Compared to ADRs and IDRs

To understand GDRs better, it’s useful to compare them with similar instruments: American Depository Receipts (ADRs) and Indian Depository Receipts (IDRs).

Conclusion

GDRs offer investors the opportunity to gain exposure to foreign companies while enjoying certain protections and conveniences associated with international exchanges. However, GDRs come with inherent risks, such as currency fluctuations, compliance costs, and limited investor control.

Despite challenges, GDRs remain an appealing option for companies and investors, provided they carefully manage the associated risks. In an increasingly globalised economy, GDRs represent a bridge between capital-seeking companies in emerging markets and the international investors eager to support growth in these regions.

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