A global depositary receipt (GDR) is a negotiable financial instrument issued by a depositary bank. It represents shares in a foreign company and trades on the local stock exchanges in investors’ countries. GDRs make it possible for a company (the issuer) to access investors in capital markets beyond the borders of its own country.
GDRs are commonly used by issuers to raise capital from international investors through private placement or public stock offerings
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.
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 procedure
- 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.
FAQs
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.
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.