Global Depository Receipts (GDR)

Understanding Global Depository Receipts (GDRs)

A Global Depository Receipt (GDR) is essentially a certificate that represents shares in a foreign company, allowing investors from different countries to invest without directly buying stock in the company’s home market. These receipts are issued by a depository bank and traded on international stock exchanges, typically outside the U.S.—with popular listings in places like London, Singapore, or Luxembourg.

The idea is simple: rather than listing shares separately on multiple foreign exchanges, a company can issue GDRs, which mirror ownership in its equity. One GDR might stand for a set number of actual shares, though this ratio can differ depending on the company and the issuing bank.

For Indian firms, GDRs offer a way to tap into global capital without the complications of a direct foreign listing. It allows them to reach a wider investor base, often with fewer regulatory hurdles abroad. With backing from SEBI and newer financial hubs like GIFT City’s IFSC, Indian companies—like UPL Ltd., GAIL India, and Aditya Birla Capital—have used GDRs to expand their reach and attract foreign funds more efficiently.

In short, GDRs serve as a practical bridge between domestic businesses and global investors.
 

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 (GDRs)

• Access to Foreign Capital: Instead of going through the lengthy process of a direct overseas listing, companies can use GDRs to attract investment from international markets with relative ease.
• Better Liquidity: Listing on global stock exchanges gives companies greater visibility and often leads to improved trading volumes, which makes it easier for investors to enter or exit positions.
• Broader Investor Base: With GDRs, companies can reach investors far beyond their home country, making them less dependent on domestic sentiment or market trends.
• Lower Costs Compared to Full Listings: Although there are still fees involved, issuing GDRs is generally more affordable than undertaking a full-scale foreign listing with all its regulatory overhead.
• Boost to Brand Image: A global listing sends a message that the company is serious about expansion. It helps build credibility among foreign stakeholders and opens doors for international partnerships.
• Currency Flexibility for Investors: Because GDRs are typically denominated in foreign currencies, they offer investors a way to diversify currency risk across geographies.
• Favourable Valuations: Sometimes, global investors place a premium on emerging market companies, which can lead to stronger valuations when compared to domestic markets.
   

Disadvantages of Global Depository Receipts (GDRs)

Despite the benefits, GDRs do come with a few drawbacks worth noting:

• Currency Volatility: Since GDRs are priced in foreign currencies, a shift in exchange rates can impact returns, especially when profits are converted back into the investor’s local currency.
• Complex Regulatory Requirements: Companies must comply with regulations in both their home country and the market where the GDR is listed. This dual compliance can make the process more time-consuming and expensive.
• Liquidity Gaps: In some markets, GDRs may not trade as actively as the underlying shares, which can lead to lower trading volumes and wider spreads.
• Limited Voting Rights: GDR holders usually don’t get the same rights as ordinary shareholders, meaning they might not have much say in company decisions.
• Issuance Expenses Still Apply: Though more affordable than direct listings, issuing GDRs isn’t cheap. Legal, advisory, and administration costs can still add up.
• Investor Access Restrictions: Depending on regulatory rules, not all investors in a country may be allowed to invest in GDRs, potentially reducing demand.
• Country-Specific Exposure: Political or economic turmoil in the issuing company’s home country can still affect the value of the GDR.
• Tax Complexity: Investors may face taxes in both the issuing country and the trading country. Without tax treaties in place, this could reduce net returns.
   

Trading GDRs

GDRs are traded much like regular stocks—except behind each one lies a layered mechanism. When an investor buys a GDR, the actual shares are held by a custodian bank in the issuing company’s home country, while the GDR itself is managed by a depository bank overseas. This setup ensures the investor has a claim on the company’s shares, without owning them directly.

Trades usually involve two brokers—one in the investor’s country and another in the home market of the issuing company. These brokers coordinate the deal, while the depository handles the paperwork and the custodian secures the actual shares.

Investors can sell their GDRs on the global exchange where they’re listed, or convert them into the underlying shares, if they prefer domestic trading. GDRs can also be cancelled and returned to the issuing firm.

Interestingly, some traders engage in arbitrage—buying the GDR if it’s priced lower than the local shares (converted to the same currency) and selling the higher-priced asset. This kind of activity helps bring prices in sync over time.
 

GDRs vs. ADRs

Though they serve a similar purpose, GDRs and ADRs aren’t quite the same.

GDRs allow companies to list shares in multiple countries outside their home market. For example, an Indian company could issue GDRs traded in both Europe and Asia, giving it exposure to various investor pools. A depository bank issues these instruments, backed by the underlying shares held with a custodian.

ADRs, on the other hand, are issued specifically for trading on U.S. exchanges. A U.S. bank buys the foreign shares, holds them securely, and issues ADRs for local trading on platforms like the NYSE or NASDAQ.

The key difference? GDRs cater to multiple international markets, while ADRs are exclusive to the U.S.. Companies pick one or the other depending on which investors they want to attract.
 

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.

Procedure for Issuing GDRs

The process of issuing GDRs isn’t a casual affair—it involves careful planning, regulatory clearances, and coordination between several financial institutions.

First, the company issues fresh equity shares in Indian rupees and allocates them to a local custodian bank. These shares remain in custody and are not immediately listed in India.

The next step involves obtaining approvals—from the board of directors, shareholders, SEBI, and sometimes the FIPB. Once the green light is secured, the custodian transfers the shares to an overseas depository bank.

The depository then issues GDRs, usually denominated in a widely traded currency like USD or EUR, and lists them on the target international exchange.

After a lock-in period (typically 45 days), investors can either trade the GDRs or convert them into the underlying shares. They also have the option to cancel the GDRs and return them to the issuing company.

This method lets companies access international funding without directly engaging with the complexities of foreign stock listings.
 

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.