What is a Global Depository Receipt?

Example of a GDR

Indian firms such as Infosys, amongst others, have raised international capital by making use of GDRs.

One such example is that of Infosys. This firm made use of GDRs in order to make investments abroad and enhance its presence worldwide. By using GDRs, foreign investors managed to invest in the firm without directly purchasing the shares from Indian stock exchanges.

Apart from Infosys, many Indian firms have also made use of GDRs in the past, such as Tata Motors, Reliance Industries, State Bank of India, ICICI Bank, HDFC Bank, and Wipro. Such firms used GDRs to finance their business expansion plans.

From the above discussion, it becomes clear that GDRs make it convenient for international investors to invest in firms in various countries and, at the same time, help firms raise money.

How Do Global Depository Receipts Work?

After understanding GDR meaning, let’s look at the process of issuing and trading GDRs, which generally follows these steps:

1. Company Issues Shares

A company decides to raise capital from international markets and issues a specific number of shares.

2. Shares Are Deposited with a Custodian Bank

The shares are held by a domestic custodian bank in the company's home country.

3. Depository Bank Creates GDRs

An overseas depository bank issues Global Depository Receipts against the deposited shares.

4. GDRs Are Listed on Foreign Exchanges

The receipts are listed and traded on international stock exchanges, making them accessible to foreign investors.

5. Investors Purchase GDRs

Investors buy and sell GDRs through the exchange just as they would trade other listed securities.

6. Investors Receive Economic Benefits

GDR holders may receive dividends and other corporate benefits linked to the underlying shares.

7. Conversion May Be Allowed

Depending on applicable regulations and issue terms, GDR holders may convert their receipts into underlying shares.

Features and Characteristics of GDR

Below are some features and characteristics of GDR

1. Represents Underlying Shares

Each GDR corresponds to a fixed number of shares of the issuing company.

2. Traded Internationally

GDRs are listed on overseas exchanges, allowing investors from multiple countries to participate.

3. Issued by Depository Banks

A depository bank issues and manages the receipts on behalf of the company.

4. Denominated in Foreign Currency

Most GDRs are traded and settled in internationally accepted currencies such as US Dollars or Euros.

5. Improves Global Investor Access

Investors can gain exposure to foreign companies without directly investing in domestic exchanges.

6. Provides Liquidity

GDRs can be bought and sold on recognised international exchanges.

7. Supports Capital Raising

Companies can raise funds from a broader investor base beyond their domestic market.

8. Subject to Regulatory Requirements

Issuers and investors must comply with the regulations of both domestic and international markets.

Pros and Cons of GDR

Here are some major advantages and disadvantages of GDR

GDR vs ADR – Key Differences

Below are the key differences between GDR and ADR:

Important Considerations When Investing in GDRs

Before investing in GDRs, investors should keep the following points in mind:

• Understand the financial health and business fundamentals of the issuing company.
• Review the exchange where the GDR is listed and assess its liquidity levels.
• Consider currency risks, as exchange rate movements can influence returns.
• Evaluate the regulatory environment applicable to the issuing company and the listing market.
• Check the rights available to GDR holders, including dividend eligibility and conversion provisions.
• Monitor geopolitical and economic developments that may affect international investments.
• Assess trading volumes to ensure smooth buying and selling opportunities.
• Review company disclosures, annual reports, and corporate announcements regularly.
• Consider the taxation rules applicable in your country of residence.
• Align the investment with your overall portfolio goals and risk appetite.

Conclusion

GDRs have an important function of linking firms with international investors. GDRs offer firms the chance to get access to global financial markets while investors get the chance to diversify their portfolios beyond domestic investments. With the help of knowing how GDRs work and their characteristics, pros, cons, and the difference between GDRs and ADRs, it becomes possible for investors to make better decisions.