Global Depository Receipt (GDR): Meaning, Features & Example

Depository Receipts (DRs) offer an option for the globalization of equities in emerging market economies. DRs are negotiable certificates that represent shares in a foreign company and are traded in local exchanges of most advanced economies. ADR (American Depository Receipt) and GDR (Global Depository Receipt) are two depository receipts that are traded in local markets but represent the equity of a company listed in another country.As per a report, issuance of ADRs/GDRs rose to $1.8 billion in 2018-19 as against zero in the year 2017-18.

Though both GDR and ADR are used to raise funds from the foreign market, there is a fundamental difference between both. ADRs are traded on the US stock exchanges while GDRs are traded mostly on European Exchanges.

GDRs are negotiable certificates issued by depositary banks that represent ownership of a specified number of a company’s shares. These receipts can be listed and traded independently from the underlying shares. With GDRs, foreign companies can trade in any country’s stock market except the US stock market . Those holding GDRs can convert them into shares by surrendering the receipts to the bank.They are listed on Non-US stock exchanges like the London Stock Exchange or the Luxembourg Stock Exchange. The GDR market is an institutional one and hence offers less liquidity but allows trading across a more significant number of countries.For example, if Infosys wants to list its share in Australia, they will deposit a substantial number of shares with an Australian Bank. The bank can then issue receipts (GDRs) against these shares to investors. Each receipt represents a particular number of shares.

SEBI came out with a detailed framework for issuance of depository receipts (DR) in October 2019. The introduced changes allow increased access to foreign funds through ADRs and GDRs.Indian companies can now list their GDR at the International Financial Services Centre in Gujarat. With the new rules in place, the companies now have an additional source for raising funds. As per the amended rules, DRs can be issued by way of public offering, private placement, or in a manner that is accepted in the concerned jurisdiction. Companies planning to issue GDR need to seek prior approval of the Ministry of Finance and Foreign Investment Promotion Board (FIPB).Examples of companies that have issued GDRs in India include Aditya Birla Capital listed in the Luxembourg Stock Exchange, GAIL Indian is listed in the London Stock Exchange, UPL is listed on Singapore Exchange.

Indian businesses can only list on foreign exchanges via a Global Depositary Receipt (GDR). It is possible to trade the GDR. As a result, through a GDR, Indian businesses can receive foreign funding.
Global Depository Receipt: A negotiable instrument with a foreign currency denomination. Indian firms can trade their shares on markets except the US using a GDR.On the national stock exchange of that nation, depository receipts are traded similarly to shares. Investors can afterwards buy & sell like they would any other share.
An intermediary, the Depository Bank, serves as the guardian of the shares that the Indian business issues. GDR aids Indian businesses in gaining access to international capital in this way.Let's use Microsoft as an illustration. The business desires to float its stock in Singapore. Microsoft must deposit a sizeable amount of shares with a Singaporean bank. After that, this bank will provide a receipt for the shares. As a result, each receipt the bank issues correspond to a certain amount of stock in the company.Indian companies can only offer their shares on overseas exchanges through GDR. As a result, the company may raise money outside of India using the granted negotiable certificate. Businesses can trade their shares on international exchanges to enable this.Additionally, the value of the underlying share affects the value of a Global Depository Receipt. Nonetheless, foreign nationals' shares are exchanged & resolved independently of the underlying share. Additionally, 1 GDR typically equals ten underlying shares. Nevertheless, there is room for variation in the GDR to share count ratio. SEBI, in 2019, released a detailed structure for issuing depository receipts (DR). The new set of rules also makes it easy to purchase foreign currency using ADRs & GDRs.Indian businesses can list their international receipts at Gujarat’s International Financial Services Centre. Now, companies can obtain funding from overseas sources.The revised guidelines provide that Global Depository Receipts may now be issued through a public offering, a private placement, or other ways permitted in the applicable jurisdiction. Additionally, businesses that intend to issue GDRs must first receive approval from the Foreign Investment Promotion Board (FIPB) & Ministry of Finance.

An American Depository Receipt (ADR) is a negotiable certificate reflecting securities of a foreign business trading on the US stock market issued by a US bank & denominated in US dollars. The receipts represent a claim against the number of underlying shares. American investors have the option of purchasing ADRs. US investors can make investments in non-US corporations through ADRs. The dividend is paid in US dollars to ADR holders.ADRs can be transferred quickly & without paying any fees. The quantity of underlying shares is automatically transferred when an ADR is transferred.

The following details highlight the critical distinction between ADR & GDR:A) American Depository Receipt is referred to as ADR, & Global Depository Receipt is referred to as GDR.B) A US depository bank will issue an ADR in exchange for a certain quantity of shares of stock in a non-US company that is traded on the US stock market. An international depository bank will issue a tradable instrument called a GDR to represent shares of a foreign company that are traded on the international market.C) Although GDR can be negotiated anywhere around the globe, ADR can only be negotiated in America.D) The American Stock Exchange is where ADR is listed for trading. In contrast, GDR is listed on stock exchanges outside the US, such as the London Stock Exchange & the Luxembourg Stock Exchange.E) The Securities and Exchange Commission's (SEC) strict guidelines for ADR disclosure are onerous. GDR has less stringent disclosure obligations.F) The ADR market is a market for retail investors with substantial investor activity & where a firm's shares are valued appropriately. The market is institutional & has less liquidity than the GDR.

Here is a list of advantages of GDRs for investors: 1) GDRs assist multinational businesses in connecting with many investors.2) GDRs give investors the chance to diversify their holdings globally.3) They might boost the liquidity of shares.4) Opening international brokerage accounts and buying equities on foreign markets are more time-consuming and expensive than using GDRs.5) Businesses can carry out a private offering that is both efficient and affordable.6) Shares listed on significant international markets can raise the stature or credibility of a foreign business that would otherwise be unknown.7) GDR holders realise any dividends and capital gains in US dollars.8) GDRs are traded, cleared, and settled in accordance with the investor's domestic policies.9) There are no cross-border custody or safekeeping fees for investors. Here is a list of disadvantages of GDRs for investors: 1) Administrative costs associated with GDRs could be high.2) To prevent paying taxes twice on capital gains , US investors may need to request a credit from the Internal Revenue Service (IRS) or a refund from the foreign government's taxing body.3) GDRs may have poor liquidity, which would make it challenging to sell them.4) Dividend payments are made after deducting currency exchange fees and international taxes.5) The depositary bank makes the necessary deductions for costs and foreign taxes automatically.6) Along with liquidity issues, they may also face political and currency risks.7) This implies that occurrences in other countries, such as a crisis, financial meltdown, or political instability, may cause the value of the GDR to change.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.