Global Depository Receipts (GDR)

Global Depository Receipts (GDR) Meaning

GDRs are a way for foreign companies to raise capital in foreign markets without having to list their shares on the local stock exchange. Instead, a bank buys the shares of the foreign company and issues GDRs in exchange. The bank holds the underlying shares and issues GDRs representing those shares to investors. GDRs are denominated in a currency such as US dollars and traded on international stock exchanges. This allows investors to invest in foreign companies without having to deal with the complexities of investing in a foreign stock exchange, while also providing companies with access to a broader pool of international investors.

Characteristics of Global Depository Receipts

Here are some key characteristics of Global Depository Receipts (GDRs):

1.    Denomination: GDRs are typically denominated in a currency such as US dollars or euros.
2.    Issuers: GDRs are issued by banks or financial institutions in foreign countries on behalf of foreign companies that wish to raise capital from international investors.
3.    Ownership: GDRs represent ownership in a foreign company. The underlying shares are held by the bank or financial institution that issues the GDRs.
4.    Trading: GDRs are traded on international stock exchanges, allowing investors to invest in foreign companies without having to deal with the complexities of investing in a foreign stock exchange.
5.    Dividends: GDR holders are entitled to receive dividends and other distributions from the underlying shares.
6.    Conversion: GDRs can be converted into the underlying shares at the option of the holder.
7.    Regulatory requirements: GDRs are subject to regulatory requirements in the country of issuance and the country where they are traded.
 

Global Depository Receipts Example- Infosys

In 2013, Infosys issued 30 million GDRs, each representing one share of Infosys, on the Luxembourg Stock Exchange. 

The GDRs were issued by JP Morgan Chase Bank, N.A. and represented approximately 2.2% of the company's outstanding shares. The GDRs were priced at $14.58 per share and raised a total of $438 million.

By issuing GDRs, Infosys was able to raise capital from international investors without having to list its shares on a foreign stock exchange. The GDRs were listed on the Luxembourg Stock Exchange and traded like regular shares, allowing investors to invest in Infosys without the need to navigate the Indian stock market.

The GDRs also provided Infosys with access to a broader pool of international investors and helped to improve liquidity for the company's shares.
 

Advantages of Global Depository Receipts

Here are some advantages of Global Depository Receipts (GDRs):

1.    Access to International Capital: GDRs allow companies to raise capital from international investors without having to list their shares on a foreign stock exchange. This provides companies with access to a larger pool of capital, which can help to fuel their growth.
2.    Improved Liquidity: GDRs trade on international stock exchanges, which can provide companies with greater liquidity for their shares. This can make it easier for investors to buy and sell shares in the company, which can help to increase demand for the shares.
3.    Diversification: By issuing GDRs, companies can diversify their investor base and reduce their reliance on domestic investors. This can help to reduce the risk of the company's share price being impacted by events in the domestic market.
4.    Cost Savings: GDRs can be a cost-effective way for companies to raise capital from international investors. They can avoid the costs associated with listing their shares on a foreign stock exchange and may also benefit from lower compliance costs.
5.    Brand Building: GDRs can help to raise a company's profile in international markets, which can help to build the company's brand and increase awareness of its products and services.
6.    Currency Hedging: GDRs can also provide currency hedging benefits for investors. As GDRs are denominated in a foreign currency, they allow investors to invest in a foreign company while minimising their currency risk. This can be particularly beneficial for investors who wish to diversify their portfolio and reduce their exposure to their home currency.
7.    Increased Valuation: By listing on a foreign stock exchange, GDRs can help to increase a company's valuation. This is because companies may benefit from the higher valuations and more favourable regulatory environments of international stock exchanges.
8.    Enhanced Reputation: GDRs can help to enhance a company's reputation in international markets. By issuing GDRs, companies can demonstrate their commitment to international expansion and may be viewed as more attractive to investors who are seeking exposure to foreign markets.

Disadvantages of Global Depository Receipts

Here are some disadvantages of Global Depository Receipts (GDRs):

1.    Currency Risk: GDRs are denominated in a foreign currency, which exposes investors to currency risk. Exchange rate fluctuations can impact the value of the GDRs and may result in losses for investors.
2.    Regulatory Compliance: Issuing GDRs requires compliance with regulatory requirements in both the country of issuance and the country where they are traded. This can increase compliance costs and add complexity to the process.
3.    Liquidity Risk: GDRs may not be as liquid as the underlying shares, which can result in a wider bid-ask spread and make it more difficult for investors to buy and sell GDRs.
4.    Limited Control: GDR holders do not have the same rights and privileges as holders of the underlying shares. They may have limited control over the company's operations and may not be able to exercise voting rights.
5.    Cost: While GDRs can be a cost-effective way to raise capital from international investors, the cost of issuing GDRs may still be higher than issuing shares domestically. This can result in higher financing costs for the company.
6.    Limited Market Access: GDRs may not be available to all investors due to regulatory restrictions or market access limitations. This can limit the potential pool of investors and reduce demand for the GDRs.
7.    Country Risk: GDRs are subject to country risk, which refers to the risk associated with investing in a foreign country. Political instability, economic conditions, and regulatory changes can all impact the value of GDRs. 
8.    Taxation: GDRs may be subject to taxation in both the country of issuance and the country where they are traded. This can result in higher tax liabilities for investors.

What are the features of a GDR?

Here are some features of Global Depository Receipts (GDRs):

1.    Denomination: GDRs are typically denominated in a foreign currency such as US dollars or euros.
2.    Issuers: GDRs are issued by banks or financial institutions in foreign countries on behalf of foreign companies that wish to raise capital from international investors.
3.    Underlying Shares: GDRs represent ownership in a foreign company. The underlying shares are held by the bank or financial institution that issues the GDRs.
4.    Trading: GDRs trade on international stock exchanges and are bought and sold like regular shares.
5.    Dividends: GDR holders are entitled to receive dividends and other distributions from the underlying shares.
6.    Conversion: GDRs can be converted into the underlying shares at the option of the holder.
7.    Custodian: A custodian bank holds the underlying shares on behalf of the GDR holders.
8.    Regulation: GDRs are subject to regulatory requirements in the country of issuance and the country where they are traded.
9.    Depository: GDRs are issued and traded through depositories that hold the underlying shares.
10.    Transferability: GDRs can be transferred between investors and can be held in electronic form.
11.    Expiration Date: GDRs typically have an expiration date, after which they must be converted into the underlying shares or sold.
12.    Listing Requirements: GDRs must meet the listing requirements of the stock exchange where they are traded.
13.    Limited Voting Rights: GDR holders may have limited voting rights, as the underlying shares are held by a custodian bank.
14.    Fees: GDRs may be subject to fees, such as issuance fees, custodian fees, and depository fees.
15.    Market Access: GDRs may not be available to all investors due to regulatory restrictions or market access limitations. This can limit the potential pool of investors and reduce demand for the GDRs.

Global Depository Receipts Example- Tata Motors LTD

In 2018, Tata Motors issued 7 million GDRs on the Luxembourg Stock Exchange, each representing six underlying shares of the company. The GDRs were priced at $23.50 per share and raised a total of $124.5 million.

By issuing GDRs, Tata Motors was able to raise capital from international investors without having to list its shares on a foreign stock exchange. The GDRs were listed on the Luxembourg Stock Exchange and traded like regular shares, allowing investors to invest in Tata Motors without the need to navigate the Indian stock market. The GDRs also provided Tata Motors with access to a broader pool of international investors and helped to improve liquidity for the company's shares.

Conclusion

We trust that this article has offered you significant insights on the global depository receipts meaning. GDRs provide access to global capital markets, diversify the investor base, and can be a cost-effective way to raise capital. Investors can also benefit from GDRs by gaining access to foreign companies without the need to navigate complex foreign markets.

However, GDRs also come with certain disadvantages, such as currency risk, regulatory compliance, liquidity risk, limited control, cost, limited market access, dilution of ownership, country risk, limited information, complex structure, and taxation. Companies should carefully consider these factors before deciding to issue GDRs.

Despite these challenges, GDRs remain an attractive option for companies looking to raise capital from international investors. By using GDRs, companies can tap into global capital markets, gain access to a broader pool of investors, and increase liquidity for their shares. As long as the risks associated with GDRs are managed appropriately, they can be an effective way for companies to raise capital and grow their businesses in today's global economy.