Global Depository Receipts (GDR)

Publication Date :

28 Jul, 2019

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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 ten 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, that 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:

Bombay Dyeing
Axis Bank
Indiabulls Housing
HDFC Bank, and many more.

Companies usually issue GDRs from developing and emerging markets because they can offer relatively higher growth than developed economies and, therefore, 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 various stock exchanges simultaneously.
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 the intermediary is planning to target. Usually, one GDR certificate holds ten 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 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 profit from 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 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 carried out by big names such as JP Morgan, Deutsche, Citibank, etc. It is giving companies worldwide 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 are denominated in the domestic currency of the company whose shares are held in the GDR. A favorable exchange rate movement can 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 various financial regulators. Adhering to all the regulations is crucial, 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 stated earlier, Global Depository Receipts are exposed to 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 multiple 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 Global Depositary Receipts mechanism, a company's shares 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.

Conclusion

Global Depository Receipts(GDR) have emerged as the most efficient and widely known method of raising capital from foreign markets. It benefits both by 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 in developing and emerging markets to take advantage of high growth rates in those countries compared to the developed countries. A GDR can be issued in any freely convertible foreign currency.