Global Depositary Receipt (GDR)

A Global Depositary Receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company. These shares are held by a foreign branch of an international bank. They are traded as domestic shares but are offered for sale globally through the various bank branches. GDRs are widely used to tap into the global equity markets by foreign issuers.

Overview and Definition

What is a Global Depositary Receipt?

A Global Depositary Receipt (GDR) serves as a negotiable instrument that represents shares in a foreign company, facilitating international trade in the company’s shares. Essentially, GDRs allow investors to hold shares in foreign companies without the complications of cross-border and securities regulatory constraints. These instruments enable companies to raise capital from multiple international markets through a single security.

How GDRs Work

GDRs are predominantly issued by international banks. The process begins when a foreign company deposits its shares with a domestic custodian bank. The international bank then issues GDRs based on these shares, usually in more than one country. These receipts are traded on local stock exchanges as domestic shares, despite representing shares in a foreign entity.

Mechanisms and Structure

Issuance Process

The issuance of GDRs involves several steps and parties:

1. Depositing Shares: The foreign company deposits its shares with a custodian bank in its home country.
2. Issuing GDRs: The custodian bank then informs the depository bank (an international bank), which issues the receipts based on the deposited shares.
3. Trading: These GDRs are then listed and traded on international stock exchanges, where they can be purchased by investors in different countries.

Custodian and Depository Banks

• Custodian Bank: Holds the underlying shares on behalf of the investors and ensures that the rights of the investors are protected.
• Depository Bank: Issues the GDRs and facilitates the trading of these receipts in global markets.

Dividend Distribution

Dividends from the foreign shares are collected by the custodian bank and then passed through the depository bank to the GDR holders, typically in the investors’ local currency. This allows investors to receive dividends without dealing in foreign currencies.

Advantages of GDRs

For Companies

1. Access to Capital Markets: GDRs enable companies to access multiple international capital markets simultaneously, broadening their investor base.
2. Increased Visibility: Listing on major international exchanges increases company visibility and can lead to enhanced investor perception.
3. Diversification of Funding Sources: Provides companies with the opportunity to attract investments from different regions, reducing reliance on domestic markets.

For Investors

1. International Diversification: GDRs allow investors to diversify their portfolios internationally without direct exposure to foreign markets.
2. Liquidity: GDRs are traded on major stock exchanges, providing liquidity and flexibility for investors.
3. Ease of Trading: Investors can trade in their local markets without the complexities of dealing with foreign exchanges and regulations.

Risks and Considerations

Foreign Exchange Risk

Since GDRs represent shares in a foreign company, they expose investors to foreign exchange risk. Fluctuations in exchange rates can impact investment returns.

Regulatory Risks

Investors face regulatory risks stemming from differences in corporate governance practices, accounting standards, and regulatory environments between their home country and the issuing company’s country.

Market Risks

GDRs are subject to market risks like any other equity investment, including volatility and changes in market conditions.

Major Markets for GDRs

London Stock Exchange (LSE)

The London Stock Exchange is a prominent venue for trading GDRs. Companies from emerging markets often use the LSE to issue GDRs and access the vast pool of international capital available in London.

Luxembourg Stock Exchange

The Luxembourg Stock Exchange specializes in GDR listings and provides a conducive regulatory environment for such instruments.

Singapore Exchange (SGX)

The Singapore Exchange offers a platform for trading GDRs, helping companies tap into the affluent and growing markets in Asia.

Examples of Companies Using GDRs

Several major companies use GDRs to raise capital in international markets. Here are a few examples:

• Infosys: An Indian multinational corporation that provides business consulting, information technology, and outsourcing services (Infosys).
• Lukoil: A Russian multinational energy corporation (Lukoil).
• Gazprom: A large Russian energy company (Gazprom).

These companies are able to tap into a wider pool of investment by issuing GDRs, benefiting from the increased capital and expanded investor base.

Conclusion

Global Depositary Receipts (GDRs) are an essential financial instrument for both companies and investors looking to expand their horizons internationally. They offer companies a method to access multiple capital markets while providing investors a way to diversify their portfolios globally. Despite the risks associated with currency exchange and regulatory differences, GDRs remain a popular vehicle for international trade and investment, enhancing liquidity, visibility, and financial opportunities on a global scale.