A global depository receipt (GDR and sometimes spelled depositary) is a general name for a depositary receipt where a certificate issued by a depository bank, which purchases shares of foreign companies, creates a security on a local exchange backed by those shares. They are the global equivalent of the original American depositary receipts (ADR) on which they are based. GDRs represent ownership of an underlying number of shares of a foreign company and are commonly used to invest in companies from developing or emerging markets by investors in developed markets.
Prices of global depositary receipt are based on the values of related shares, but they are traded and settled independently of the underlying share. Typically, 1 GDR is equal to 10 underlying shares, but any ratio can be used. It is a negotiable instrument which is denominated in some freely convertible currency. GDRs enable a company, the issuer, to access investors in capital markets outside of its home country.
GDRs are commonly used by issuers to raise capital from international investors through private placement or public stock offerings.
Following is the process of issuing Global Depository Receipts:
- Indian corporations issue their equity shares (in Indian rupees) to an overseas depository bank through a domestic custodian bank.
- The local custodian bank then acts as the overseas depository bank’s agent and holds the equity shares in its possession.
- The overseas depository bank then provides GDRs (in foreign currency). The bank then converts the GDRs into shares to trade on the country’s stock exchange. Thus, the country’s investors can buy and sell the shares just like any other security.
Features of GDR
- Indian companies can get access to foreign funds through GDRs. However, only companies with a sound financial record of three years can get access to GDRs. Thus, to obtain GDRs, Indian companies should get clearance from the Foreign Investment Promotion Board (FIPB) and the Ministry of Finance.
- They are negotiable financial instruments. These instruments trade on the stock exchange like any other security.
- These Receipts are foreign currency-denominated instruments. However, the shares are denominated in the local currency of the deposit receipt issuer.
- The depository bank can convert the GDR into shares and trade them on their domestic stock exchange.
- The investors get dividend and bonus share of the underlying Global Depository Receipt.
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.
An American depositary receipt (ADR, and sometimes spelled depository) is a negotiable security that represents securities of a foreign company and allows that company’s shares to trade in the U.S. financial markets.
Shares of many non-U.S. companies trade on U.S. stock exchanges through ADRs, which are denominated and pay dividends in U.S. dollars, and may be traded like regular shares of stock. ADRs are also traded during U.S. trading hours, through U.S. broker-dealers. ADRs simplify investing in foreign securities because the depositary bank “manage[s] all custody, currency and local taxes issues”.
ADRs can be transferred quickly & without paying any fees. The quantity of underlying shares is automatically transferred when an ADR is transferred.
A bank issues a sponsored ADR on behalf of the foreign company. The bank and the business enter into a legal arrangement. The foreign company usually pays the costs of issuing an ADR and retains control over it, while the bank handles the transactions with investors. Sponsored ADRs are categorized by what degree the foreign company complies with Securities and Exchange Commission (SEC) regulations and American accounting procedures.
A bank also issues an unsponsored ADR. However, this certificate has no direct involvement, participation, or even permission from the foreign company. Theoretically, there could be several unsponsored ADRs for the same foreign company, issued by different U.S. banks. These different offerings may also offer varying dividends. With sponsored programs, there is only one ADR, issued by the bank working with the foreign company.
One primary difference between the two types of ADRs is where they trade. All except the lowest level of sponsored ADRs register with the SEC and trade on major U.S. stock exchanges. Unsponsored ADRs will trade only over the counter. Unsponsored ADRs never include voting rights.
|Global Depository Receipt||American Depository Receipt|
|Meaning||GDR is a negotiable instrument issued by a foreign depository bank to an Indian company.||ADR is a negotiable instrument issued by a US depository bank to an Indian company.|
|Relevance||Indian companies can trade in any stock exchange other than the US.||Indian Companies can trade in the US stock market.|
|Issued In||Global capital market||United States capital market|
|Listed In||Non-US Stock Exchanges||American Stock exchanges only. NASDAQ, NYSE, etc.|
|Investors||Mostly Institutional Investors||Retail Investors|
|Investor Participation||Less, in comparison to ADR.||More, in comparison to GDR.|
|Liquidity||Less liquid than ADR.||More liquid than GDR.|
Euro Issues are new financial instruments traded in the international financial markets. Euro issue is a name given to sources of finance or capital available to raise money outside the home country in foreign currency. In other words Euro issues (from India perspective) are a method or mode by which Indian companies raise funds outside India in foreign currency. This has become an important source or raising finance by the Indian companies. Foreign investors and NRIs are the main subscribers to these securities. The most commonly used sources of funds that fall under Euro issues are American Depository Receipts (ADR), Global Depository Receipts (GDR), and Foreign Currency Convertible Bonds (FCCB). In India, before the adoption of new economic policy, domestic companies were not permitted to trade their securities in the stock market outside the country. Before that only the debt instruments were permitted issue outside the country. With the adoption of New Economic Policy (LPG model), Indian companies are allowed to raise their resources by way of equity issue in the international market, especially in European stock markets. This move was taken by the government to increase the foreign exchange reserve in the country, which were in a depleted state before the liberalisation. Different forms of Euro Issues are explained below.
- Global Depository Receipts (GDRs)
- American Depository Receipts (ADRs)
- Foreign Currency Convertible Bonds (FCCBs)
These are the various forms of Euro Issues and in order to issue these types of securities a prior permission should be obtained from the Department of Economic Affairs, Ministry of Finance. At the same time an Indian company which are not eligible to raise funds from Indian capital market, including companies restrained by the SEBI from accessing the securities market would not be eligible to issue FCCBs and GDRs. Unlisted Indian companies issuing GDRs/FCCBs should be simultaneously listed in Indian stock exchanges.
- Funds by way of euro issue acts as a cheap source of foreign currency funds for the company without exchange risks especially for companies that have foreign currency receivables.
- Issues provide a larger market and international access to funds and may lead to easy larger volume funding which may be difficult from domestic sources. It opens up many new opportunities for the companies in new markets.
- Gain international exposure and can enhance liquidity for its shares.
- Though euro issues are usually available at lower costs, companies which do not have adequate receivables may run currency exchange risk and may have to incur hedging costs which may turn out to be higher than the cost saved.
- All companies can avail funds via euro issues. The companies have to follow the guidelines issued by Reserve Bank of India and meet the criterions to avail funding through this route.
- Companies may have to undergo stake dilution if raised by way of equity or convertible bonds.