A Global Depository Receipt is a negotiable instrument denominated in a foreign currency. Through a GDR, Indian companies can trade their shares on international exchanges other than the US. The depository receipt for an Indian company is issued by a foreign depository.
On that country’s domestic exchange, depository receipts trade similarly to shares. As a result, investors can purchase and sell them just like any other stock.
The Depository Bank acts as an intermediary and custodian of the shares issued by the Indian company. As a result, GDR assists Indian companies in gaining access to foreign funds.
Consider Wipro as an example. The corporation wishes to list its stock in Singapore. Wipro is required to deposit a significant number of shares with a Singapore bank. Following that, the Singapore Bank will issue a receipt in exchange for the shares As a result, each receipt issued by the bank represents a specific number of company shares..
GDR Characteristics
GDR Characteristics (Global Depository Receipt)
1. Exchange-Traded Funds
GDRs are exchange-traded assets that are created when an intermediary purchases a large number of shares in a foreign company and converts them into GDRs that can be traded on a local stock exchange. These GDRs are then traded on stock exchanges outside of the United States.
2. Another feature of GDR is the conversion ratio.
The conversion ration refers to the number of shares that a GDR can hold. It is frequently a fraction to a very large number. Despite the fact that one GDR certificate holds ten shares, the range is flexible.
3. Unprotected
GDRs are unsecured securities with no asset backing other than the securities in the certificate.
4. The Underlying Factors Determine the Price
The price of a GDR is determined by the price of the share in which it is invested, as well as supply and demand for that GDR.
5. The GDR is convertible into any foreign currency.
Fundamental shares issued by the issuer must be denominated in the issuer’s home currency, whereas GDRs are always issued in foreign currency.
6. The holder is eligible for dividends and bonuses.
GDR shareholders are entitled to bonuses and dividends based on the value of their shares.
GDR IN THE INDIAN MARKET
In October 2019, SEBI published a detailed framework for the issuance of depository receipts (DR). The new rules make it easier to access foreign funds via ADRs and GDRs.
GDRs issued by Indian companies can now be listed at the International Financial Services Centre in Gujarat. Companies now have an additional source of funding thanks to the new rules. According to the amended rules, DRs can be issued through a public offering, a private placement, or any other method recognised in the relevant jurisdiction. Companies that intend to issue GDRs must first obtain approval from the Ministry of Finance and the Foreign Investment Promotion Board (FIPB).
Aditya Birla Capital, which is listed in Luxembourg Stock Exchange, is one example of a company that has issued GDRs in India. GAIL India is listed in London Stock Exchange.
Trading Global Depositary Receipts
GDRs are issued by international corporations to attract capital from foreign investors. GDRs are traded on the investors’ home exchanges while providing exposure to the international market. While trades are taking place, a custodian/depositary bank holds the underlying shares of the GDRs, ensuring a level of protection and facilitating participation for all parties involved.
GDRs are purchased and sold by brokers who represent buyers. Brokers are typically from the home country and work in the foreign market. The actual asset purchase is multi-staged, involving a broker in the investor’s country, a broker in the international company’s market, a depositary bank representing the buyer, and a custodian bank.
Brokers can also sell GDRs on behalf of investors. An investor can either sell them as-is on the appropriate exchanges or convert them into regular stock for the company. They can also be cancelled and returned to the issuing company.
Traders dealing in GDRs frequently compare, for example, the GDR’s US dollar price to the US dollar equivalent price of the shares trading on the international company’s domestic exchange. They will usually purchase the less expensive security and sell the other. This arbitrage trading activity eventually causes the underlying shares and GDRs to equalise.
Procedure for Issuing GDR in a Company
1. Acceptances
Before GDRs can be issued, the Board of Directors, Shareholders, Regulatory Authorities, and Financial Institutions must all approve their issuance.
2. The appointment of intermediaries
Following approval, intermediates such as the Lead Manager, Co-Manager, Overseas Depository Banks, Legal Advisors, Auditors, and Underwriters are appointed as Intermediaries during the construction of the company’s GDR.
3. Provide documentation
Among the most important documents created are subscription agreements, depository agreements, and trust deeds.
4. Prior to and following the launch
At the conclusion, additional critical tasks such as timing, pricing the issue, and closing the issue are completed.
Advantages of Global Depository Receipts (GDRs)
Depository receipts increase the number of international shareholders while also making it easier for foreign investors to enter the domestic market.
By investing in depository receipts, an investor’s portfolio becomes a global portfolio. Investors can benefit from higher risk, higher return securities in foreign markets.
The primary advantage for GDR issuers is that their shares can reach a larger and more diverse audience of potential investors, and that listing their shares on major global exchanges can help to elevate the status or legitimacy of a previously unknown foreign company.
It allows investors to diversify their portfolios internationally without opening foreign brokerage accounts or dealing with exchange rates.
Depositary receipts are simply more convenient and cost-effective than buying stocks on international exchanges.
Disadvantages
Disadvantages of Global Depository Receipts (GDRs)
Taxation can be complicated. Typically, the bank automatically withholds the appropriate amount to cover expenses and international taxes. To avoid double taxation on any capital gains, investors must seek a credit or refund from the taxing authorities of the foreign government.
They may have low liquidity, which means that there aren’t many buyers and sellers, resulting in delays in entering and exiting positions.
in some cases, they may also be accompanied by significant administrative fees.
Investors are exposed to economic risks because the home country of the foreign company may experience a recession, bank failures, or political turmoil.
CONCLUSION
Depository Receipts can be used by any foreign individual or company to enter and tap different markets in order to generate cash and establish a trading presence in foreign markets. Every country wishes to expand its business and establish a presence in the global market. A Global Depository Receipt is a type of receipt that allows any corporation to issue shares on a stock exchange that is not located in the United States.
REFERENCES
https://thebusinessprofessor.com/en_US/investments-trading-financial-markets/global-depositary-receipts
https://www.investopedia.com/terms/g/gdr.asp#:~:text=Using%20GDRs%2C%20companies%20can%20raise,provide%20arbitrage%20opportunities%20to%20investors.
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