Global Depository Receipt (GDR): Meaning, Features, Example, Advantages and Disadvantages

The full form of GDR is Global Depository Receipt. Global Depository Receipt (GDR) are certificates issued by a depository bank, which purchases foreign company shares and deposits them in the account. GDRs are commonly used to raise capital from international investors through public stock offerings or private placement. It is a negotiable financial instrument issued by a foreign bank representing a foreign firm's listed securities on a stock exchange other than the United States (US). 

What is a Global Depository Receipt (GDR)?

Indian companies can only get their shares listed on foreign exchanges through Global Depository Receipts (GDR). It is a foreign currency-denominated negotiable instrument. GDRs help Indian companies get foreign funds and gain access to international capital. 

Indian companies trade shares on international exchanges except for the US through a GDR. A foreign depository issues the depository receipts for Indian companies. The depository bank is the intermediary that acts as the custodian of the shares issued by the Indian company.

Global depository receipts features

• GDRs are negotiable financial instruments traded on the stock exchanges like any other security. 
• Indian companies can access foreign funds through GDRs.
• Only companies with a three-year sound financial record can get access to GDRs. Thus, Indian companies should get clearance from the Ministry of Finance and Foreign Investment Promotion Board (FIPB) to obtain GDRs.
• The depository bank can convert GDRs into shares and trade them on the domestic stock exchanges.
• GDRs are instruments denominated in foreign currencies. The shares are denominated in the deposit receipt issuer's local currency.
• The investors get bonus shares and dividends of the underlying GDRs.
• GDRs are issued to investors throughout the country since they can be denominated as multiple forms of freely convertible currency.
• Investors can convert GDRs into equity shares. They can sell the shares mentioned in the GDR through a local custodian after 45 days from the issue date.

What is GDR in the stock market?

GDRs are negotiable certificates that represent ownership of a specified number of shares of a company issued by depositary banks. They can be traded and listed independently from the underlying shares. Foreign companies can trade in a country's stock market through GDRs, except the US stock market. Those holding GDRs can surrender them to the bank and convert them into shares.

GDRs are listed on non-US stock exchanges like the Luxembourg or London Stock Exchange. The GDR market is institutional and thus offers low liquidity but allows trading across many significant countries.

GDR is the only way through which Indian companies can make their shares available on various foreign exchanges. Thus, the company can use the issued negotiable certificates to raise funds outside of India by trading the shares on foreign exchanges.

The value of a GDR depends on the value of the underlying share. But, the shares in the foreign country are settled and traded separately from the underlying share. Usually, 1 GDR is equivalent to 10 underlying shares. However, the GDR to the number of shares ratio can differ.

Global depository receipts in the Indian market

The Securities and Exchange Board of India (SEBI) published a comprehensive framework to issue Depository Receipts (DR) in October 2019. The new rules allow easier access to foreign capital through GDRs and ADRs.

The International Financial Services Centre (IFSC) in Gujarat allows Indian companies to list their global receipts to raise funds through foreign sources. They can only offer their shares on overseas exchanges through GDRs. GDRs can be issued by private placement, public offering or any other method acceptable in the relevant jurisdiction, according to the new rules. 

Indian companies who want to issue GDRs must get Ministry of Finance and FIPB clearance. Only listed companies can issue GDRs in overseas marketplaces. GDRs allow investors to gain access to international companies' capital markets without dealing with language, currency or tax restrictions.

An Indian company that wants its shares to be listed on foreign stock exchanges, such as the London and Hong Kong Stock Exchanges, except the US stock exchange, can use a GDR. The Indian company should engage with a foreign depository bank in a depositary receipt agreement. These banks issue shares on their respective stock exchanges based on regulatory compliance in both nations.

Following are a few Indian companies that have issued GDRs:

• UPL is listed on the Singapore Stock Exchange
• Aditya Birla Capital is listed on the Luxembourg Stock Exchange
• GAIL India is listed on the London Stock Exchange

Global depository receipts example

Example 1: 'Wipro' wants to list its shares in Singapore. 'Wipro' has to deposit shares with a Singapore Bank. Singapore Bank will issue a receipt against these shares. Every receipt given by the Singapore Bank represents a particular number of shares of 'Wipro'.

Example 2: An Indian company issued ADR in the American market and wishes to extend it to other developed countries, such as Europe. The company can sell the ADR to the public of Europe as GDR. GDR can be denominated in any freely convertible currency and be issued in more than one country.

Global depository receipts procedure

Following is the process of issuing GDRs:

• Indian companies issue equity shares in Indian rupees to a domestic custodian bank which transfers it to an overseas depository bank. The shareholders, board of directors, financial institutions and regulatory authorities must approve the issuance of GDRs before they are issued.
• The domestic custodian bank physically holds the equity shares. In the company's books, the depository bank is listed as the owner of the company's equity shares. Equity shareholders’ voting rights are transferred to the depository bank.
• The domestic custodian bank acts as the agent of the overseas depository bank. It holds the equity shares in its possession. 
• The overseas depository bank provides GDRs in foreign currency. The bank converts the GDRs into shares to trade them on the country's stock exchange. The country's investors can sell and buy the shares just like any other security.

Brokers representing buyers manage the sale and purchase of GDRs. Usually, the brokers belong to the home country and operate within the foreign market. The actual purchase of the assets is multi-staged, involving a broker located within the market of the international company, a broker in the investor's country, a custodian bank and a depositary bank representing the buyer.

Brokers can also sell GDRs on behalf of an investor. An investor can sell them on the proper exchanges or convert them into regular stock for the company. Additionally, they can be cancelled and returned to the issuing company.

Global depository receipts advantages and disadvantages

Below are the advantages of GDRs:

• They help multinational businesses to connect with many investors.
• They give investors a chance to diversify their holdings globally.
• They can boost the liquidity of shares.
• Buying equities on foreign markets by opening international brokerage accounts is more time-consuming and expensive than using GDRs.
• Companies can carry out a private offering that is efficient and affordable.
• Shares listed on international markets can raise the credibility of a foreign business.
• GDRs are cleared, traded and settled in accordance with the investor's domestic policies.
• There are no safekeeping fees or cross-border custody for investors.
• GDRs are easy and more cost effective than buying stocks on international exchanges.
• Since GDRs are investments, they are not subject to capital gains tax when a non-resident transfers the GDRs of a listed company to another non-resident outside of India.

Below are the disadvantages of GDRs:

• The administrative costs associated with GDRs could be high.
• They may have poor liquidity, making it challenging to sell them.
• Dividend payments are made after deducting international taxes and currency exchange fees.
• They may face political and currency risks.
• Certain occurrences in other countries, such as a financial meltdown, crisis or political instability, can cause the value of the GDR to change.
• Investors are exposed to economic risks, as the foreign company's home nation may undergo bank collapses, a recession or political turmoil.

Frequently Asked Questions on GDR

What is meant by GDR?

A Global Depository Receipt (GDR) is a depositary receipt issued by a depository bank that purchases shares of foreign companies. Indian companies can get their shares listed on foreign exchanges through GDRs. A GDR is a foreign currency-denominated negotiable instrument. Companies can trade shares on international exchanges except for the US through a GDR. 

What are ADR and GDR?

An American Depository Receipt (ADR) is a negotiable certificate issued by a US bank reflecting securities of a foreign business denominated in US dollars and trading on the US stock market. American investors can purchase ADRs to make investments in non-US corporations. The dividend is paid in US dollars to US investors holding ADRs. 

A Global Depository Receipt (GDR) is a depositary receipt issued by a depository bank that purchases shares of foreign companies. Indian companies can get their shares listed on foreign exchanges through GDRs. A GDR is a foreign currency-denominated negotiable instrument. Companies can trade shares on international exchanges except for the US through a GDR. 

What are the characteristics of GDR?

Below are the characteristics of GDRs:

• They are unsecured securities.
• They can be converted into shares.
• They are traded and listed on the stock exchange.
• GDR holders do get voting rights.
• Investors get bonus shares and dividends of the underlying GDRs.

What is the difference between ADR and GDR?

The following are the differences between ADR and GDR:

• US depository banks issue ADRs in exchange for shares of non-US companies traded on the US stock market. International depository banks issue GDRs to represent shares of a foreign company traded on the international market.
• GDRs can be negotiated anywhere around the globe. ADRs can only be negotiated in the USA.
• ADRs are listed on the American Stock Exchange for trading. GDRs are listed on stock exchanges outside the US, such as the London and Luxembourg Stock Exchanges.
• The Securities and Exchange Commission's (SEC) guidelines for ADR disclosure are strict. GDR has less stringent disclosure rules.
• The ADR market is for retail investors with substantial investor activity and where a company’s shares are valued appropriately. The GDR is institutional and has less liquidity.

In which country can GDR be issued?

GDRs can be issued in any country except the USA.