Global Depository Receipts (GDR) Meaning
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.
- Financial Intermediaries such as depository banks purchase the shares in one country, create a GDR containing those shares, and sell the GDR in the foreign market. It helps companies raise capital from foreign markets.
- GDR is a negotiable instrument, which can be denominated in any freely convertible security.
- Global Depository Receipts are based on the historical American Depository Receipts, the difference being ADRs are traded in America and GDRs are traded in multiple countries.
Some of the Indian companies who have GDRs in multiple countries include:
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- Bombay Dyeing
- Axis Bank
- Indiabulls Housing
- HDFC Bank and many more.
GDRs are usually issued by companies from developing and emerging markets because they are able to offer relatively higher growth than developed economies and therefore are able to attract more investors.
Characteristics of Global Depository Receipts
- 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 multiple 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 that are 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.
Advantages of Global Depository Receipts
The following are the advantages of global depository receipts(GDR)
- 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 most 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. This makes trading them easy even for non-resident investors. The transfer of GDR does not involve heavy 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.
Disadvantages of Global Depository Receipts
The following are the disadvantages of global depository receipts(GDR)
- High Regulation – Since Global Depository receipts are issued in multiple countries, they become subject to regulation from multiple financial regulators. It is important 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 small 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 Depository 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.
Global Depository Receipts(GDR) has emerged as the most efficient and widely known methods of raising capital from foreign markets. It provides benefits both ways: giving domestic companies access to the foreign capital markets, and giving foreign investors the opportunity to invest in domestic companies. Investors like to buy GDRs holding shares of companies of developing and emerging markets in order 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.
This has been a guide to Global Depository Receipts and its meaning. Here we discuss characteristics of GDR along with advantages, and disadvantages. You can learn more about Investment Banking from following articles –