Global Depositary Receipt

GDR/ADR/IB

1. Global Depository Receipts/ American Depository Receipts Dr. Sunita Sukhija Assistant Professor in Commerce Govt. National College, Sirsa (HRY)

2. Global Depository Receipts A Global Depository Receipt (GDR), also known as international depository receipt (IDR), is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account . Global Depository Receipts are securities certificates issued by intermediaries such as banks for facilitating investments in foreign companies. A GDR represents a certain number of shares in a foreign company that is not traded on the local stock exchange. One GDR usually holds 10 shares, but the ratio can be anything higher or lower than this. The shares in the GDR trade on their domestic  stock exchange .

3. Mechanism of Global Depository Receipt GDRs represent ownership of an underlying number of shares of a foreign company and are commonly used to invest in companies from developing or emerging markets by investors in developed markets. Prices of global depositary receipt are based on the values of related shares, but they are traded and settled independently of the underlying share. Typically, 1 GDR is equal to 10 underlying shares, but any ratio can be used. If for example, an Indian company which has issued ADRs in the American market wishes to further extend it to other developed and advanced countries such as in Europe, then they can sell these ADRs to the public of Europe and the same would be named as GDR. GDR can be issued in more than one country and can be denominated in any freely convertible currency.

4. Features of GDR 1 . It is a negotiable instrument that can be traded like any other security instrument freely. 2. Indian companies that have a solid financial record of about three years are readily allowed access to global financial markets through the use of a GDR. However, clearances are required from the Foreign Investment Promotion Board (FIPB) and the Ministry of Finance. 3. Since it can be denominated as multiple forms of freely convertible currency, GDRs are issued to investors across the country. 4. GDR is denominated in any foreign currency but the underlying shares would be denominated in the local currency of the issuer. 5. The holder is entitled to dividend and bonus on the value of shares underlying the GDR. 6. The investor can convert GDR into equity shares, and sell the shares mentioned in the GDR through a local custodian. This provision can be used after 45 days from the date of issue. 7. Under GDR, the issuing company transacts with only one entity for all its transactions.

5. Features Exchange-Traded –  Global Depository Receipts are exchange-traded instruments. The intermediary buys a bulk quantity of a foreign company and creates the GDRs, which are then traded on the local stock exchange. Since GDRs are for multiple countries, they can trade on various stock exchanges at the same time. Conversion Ratio –  The Conversion Ratio, which means the number of shares of a company that one GDR holds can be anything ranging from a fraction to a very high number. It depends on the type of investors that the intermediary is planning to target. Usually, one GDR certificate holds 10 shares. But the range is flexible. Unsecured –  Global Depository Receipts are unsecured securities. They are not backed by any asset, other than the value of the shares held in that certificate. Price Based on Underlying –  The price of a GDR is based on the price of the shares that it holds. The price also depends on the supply and demand of a particular GDR, which can be managed. The intermediary might price it a touch higher than just the value of the securities in terms of transaction costs, etc., to make a profit for being the intermediary.

6. Difference between ADR and GDR American Depository Receipt (ADR) is a depository receipt which is issued by a US depository bank against a certain number of shares owned by a non-US based company. While a Global Depository Receipt (GDR) is a depository receipt which is issued by the international depository bank, representing the foreign company’s stock.

7. Why do business firms trade in GDR’s? Companies issue GDRs to attract interest from foreign investors. GDRs provide a lower-cost mechanism in which these investors can participate. These shares trade as though they are domestic shares, but investors can purchase the shares in an international marketplace. Who can issue a GDR instrument? It is a negotiable instrument which is denominated in some freely convertible currency. GDRs enable a company, the issuer, to access investors in capital markets outside of its home country. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, The Bank of New York Mellon.

8. Advantages of Global Depository Receipts Liquidity –  Global Depository Receipts are liquid instruments that are traded on stock exchanges. The liquidity can be managed by managing the supply-demand of the instruments. Access to Foreign Capital –  GDRs have emerged as one of the essential mechanisms to raise capital from foreign markets in today’s world. The securitization process is being carried out by big names such as JP Morgan, Deutsche, Citibank, etc. It is giving companies all over the world access to foreign capital through a relatively simpler mechanism. It is also helping companies increase their worldwide visibility by issuing GDRs in multiple countries. Easily Transferrable –  Global Depository Receipts can be easily transferred from one person to another. It makes trading them easy, even for non-resident investors. The transfer of GDR does not involve extensive documentation like some other securities. Potential Forex Gains –  Since GDRs are international capital market instruments, they are exposed to foreign exchange rate volatility. The dividends paid for every share in a GDR is denominated in the domestic currency of the company whose shares are being held in the GDR. A favorable exchange rate movement can potentially provide gain beyond just the capital gains and the dividends received for the shares in a GDR.

9. Disadvantages of Global Depository Receipts High Regulation –  Since Global Depository receipts are issued in multiple countries, they become subject to regulation from various financial regulators. It is crucial to adhere to all the regulations, and even a small mistake can lead to a company being heavily reprimanded. Companies might have to bear huge consequences for even a tiny mistake. Forex Risk  – As we stated earlier, Global Depository Receipts are exposed to the foreign exchange rate volatility. Since the dividends received and the original price of the shares are denominated in the foreign currency, an  appreciation of foreign currency  can reduce the return generated and even cause losses to the investors. Suitable for HNIs  – Global Depository Receipts are usually issued with the multiple numbers of shares in each certificate to lower the transaction costs. Small investors might not be able to shell out that kind of money and might be unable to take advantage of the GDR. In this case, it becomes a more suitable product for HNIs. No Voting Rights  – Under the mechanism of the Global Depositary Receipts, the shares of a company are sold in bulk to an intermediary in another country who further securitizes them into GDRs. Therefore, the voting rights in the company are retained by the intermediary who has directly bought the shares, and not by investors who buy the GDR.

10. Conclusion Global Depository Receipts(GDR) has emerged as the most efficient and widely known method of raising capital from foreign markets. It provides benefits both ways: giving domestic companies access to the foreign capital markets, and allowing foreign investors to invest in domestic companies. Investors like to buy GDRs holding shares of companies of developing and emerging markets to take advantage of high growth rates in those countries as compared to the developed countries. A GDR can be issued in any freely convertible foreign currency.

11. Thanks