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

A Global Depository Receipt (GDR) is a powerful financial instrument that enables companies, especially from emerging markets like India, to raise capital from international investors. Issued by depository banks, GDRs represent shares of a foreign company and are traded on non-US stock exchanges, such as London or Luxembourg, in a convertible foreign currency.

This article explores the meaning, features, examples, advantages, and disadvantages of GDRs, highlighting their role in today’s interconnected financial landscape.

What is a Global Depository Receipt (GDR)?

A Global Depository Receipt (GDR) is a negotiable financial instrument issued by a depository bank that represents shares of a foreign company. These certificates are traded on international stock exchanges (excluding the United States) and allow companies, particularly from emerging markets like India, to raise capital from global investors. GDRs are denominated in a foreign currency, typically the currency of the exchange where they are listed, such as USD or EUR.

For Indian companies, GDRs are critical for accessing international capital markets and listing their shares on foreign exchanges like the London Stock Exchange (LSE) or the Luxembourg Stock Exchange. A depository bank acts as an intermediary, holding the underlying shares and issuing GDRs to investors.

Features of Global Depository Receipts

Negotiable Instrument: GDRs are freely traded on stock exchanges like regular securities.

Foreign Currency Denomination: GDRs are issued in a convertible foreign currency (e.g., USD, EUR), while underlying shares remain in the issuer’s local currency (e.g., INR for Indian companies).

Access to Global Capital: Indian companies use GDRs to raise funds from international investors.

Regulatory Compliance: In India, companies with a strong financial track record (minimum three years) require clearance from the Ministry of Finance and the Foreign Investment Promotion Board (FIPB) to issue GDRs.

Conversion to Shares: GDRs can be converted into underlying equity shares after a 45-day lock-in period and traded on domestic exchanges.

Dividends and Bonuses: GDR holders receive dividends and bonus shares proportional to the underlying shares.

Multi-Country Trading: GDRs can be issued in multiple countries and denominated in various convertible currencies.

Institutional Market: GDRs are primarily traded in institutional markets, which may result in lower liquidity compared to domestic shares.

GDRs in the Stock Market

GDRs represent ownership of a specific number of shares in a foreign company and are listed on non-US stock exchanges, such as the LSE, Luxembourg, or Singapore Stock Exchange. They are traded independently of the underlying shares, with their value tied to the price of those shares. Typically, one GDR represents multiple shares (e.g., 1 GDR = 10 shares), though the ratio varies by company.

For Indian companies, GDRs are the primary mechanism to list shares on foreign exchanges (excluding the US, where American Depository Receipts, or ADRs, are used). GDRs enable firms to attract foreign investment without investors navigating complex cross-border regulations, currency conversions, or tax issues.

GDRs in the Indian Market

In October 2019, the Securities and Exchange Board of India (SEBI) introduced a comprehensive framework for issuing Depository Receipts (DRs), including GDRs, to simplify access to foreign capital. Indian companies can issue GDRs through public offerings, private placements, or other methods permitted in the target jurisdiction.

The International Financial Services Centre (IFSC) in Gujarat’s GIFT City has emerged as a hub for listing GDRs, enabling Indian firms to raise funds globally. Only listed companies with regulatory approval from the Ministry of Finance and FIPB can issue GDRs. Examples of Indian companies with GDRs include:

• UPL Ltd.: Listed on the Singapore Stock Exchange.
• Aditya Birla Capital: Listed on the Luxembourg Stock Exchange.
• GAIL India: Listed on the London Stock Exchange.

Example of GDR Issuance

• Wipro’s GDR in Singapore: Wipro deposits its equity shares with a Singapore-based depository bank, which issues GDRs representing a fixed number of Wipro shares. Investors in Singapore can trade these GDRs on the Singapore Stock Exchange.
• Cross-Market GDR Use: An Indian company with ADRs listed in the US can issue GDRs in Europe to expand its investor base. These GDRs, denominated in EUR, are traded on exchanges like the LSE, offering European investors access to the company’s shares.

Procedure for Issuing GDRs

• Share Issuance: An Indian company issues equity shares in INR to a domestic custodian bank.
• Regulatory Approval: The issuance requires approval from shareholders, the board of directors, financial institutions, and regulatory bodies like SEBI and FIPB.
• Custody and Transfer: The domestic custodian holds the shares and transfers them to an overseas depository bank, which is recorded as the shareowner in the company’s books.
• GDR Issuance: The overseas depository bank issues GDRs in a foreign currency, which are listed and traded on the target stock exchange.
• Trading and Conversion: Investors trade GDRs through brokers. After the 45-day lock-in, GDRs can be converted into underlying shares for trading on domestic exchanges or sold back to the issuer.

Advantages of GDRs

• Global Investor Access: Companies can attract a diverse pool of international investors.
• Portfolio Diversification: Investors gain exposure to foreign markets without navigating complex regulations.
• Increased Liquidity: Listing on international exchanges can enhance share liquidity.
• Cost-Effective: GDRs are cheaper and simpler than opening international brokerage accounts for investors.
• Tax Benefits: Non-residents transferring GDRs of listed companies outside India are exempt from capital gains tax.
• Enhanced Credibility: Listing on global exchanges boosts a company’s reputation.
• No Safekeeping Fees: Investors avoid cross-border custody or safekeeping charges.

Disadvantages of GDRs

• High Administrative Costs: Issuing and maintaining GDRs can be expensive for companies.
• Low Liquidity: GDRs often trade in institutional markets, reducing liquidity compared to domestic shares.
• Currency and Political Risks: Fluctuations in exchange rates or political instability in the issuer’s home country can impact GDR value.
• Economic Risks: Investors face risks tied to the foreign company’s home market, such as recessions or financial crises.
• Tax and Fee Deductions: Dividend payments may be subject to international taxes and currency conversion fees.

Latest Updates

• SEBI’s Continued Reforms: SEBI has streamlined GDR issuance processes, encouraging more Indian firms to tap global markets.
• GIFT City’s Role: The IFSC in Gujarat is increasingly pivotal for GDR listings, with enhanced infrastructure for cross-border transactions.
• Market Trends: Indian companies are leveraging GDRs to fund green energy and technology initiatives, aligning with global ESG (Environmental, Social, Governance) investment trends.

Conclusion

Global Depository Receipts remain a cornerstone for Indian companies seeking to tap into international capital markets, offering a cost-effective and efficient way to attract global investors. While GDRs provide benefits like portfolio diversification, enhanced credibility, and tax advantages, they also come with challenges such as currency risks and lower liquidity. 

As India’s financial ecosystem evolves, with SEBI’s streamlined regulations and the rise of GIFT City’s IFSC, GDRs are poised to play an increasingly significant role in driving cross-border investments and supporting economic growth.