Global Depository Receipt (GDR)- Features, Advantages & Disadvantages

A Global Depositary Receipt (GDR) is a transferable financial instrument that a depositary bank issues. These instruments represent ownership in a foreign company and are traded on the stock exchanges in the home countries of investors. GDRs facilitate a company, the issuer, access to capital markets outside their domestic borders. Issuers frequently utilize GDRs to raise funds from global investors, whether through private placements or public stock offerings. A Global Depositary Receipt closely resembles an American Depositary Receipt (ADR), with the key distinction being that an ADR exclusively lists shares of a foreign company on U.S. markets.

This topic is important from the perspective of the UPSC IAS examination, which falls under the General Studies Paper 1 (preliminary) and General Studies Paper 3 (mains) and particularly in the Indian Economy section.

In this article, we shall discuss the GDR, ADR, IDR, DR, and Global Depository Receipts features, examples, Global Depository Receipts meaning, and conclusions.

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What is a Depositary Receipt (DR)?

A Depository Receipt (DR) is a negotiable economic instrument issued through an agency in a foreign jurisdiction traded on local stock exchange. They characterize positive securities like shares, bonds, etc. A depository Receipt (DR) is an essential mechanism for raising funds via tapping foreign investors who otherwise may no longer be able to participate in the domestic market. In India, any private or public company, limited or listed or unlisted, successfully issues DRs.

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What is Global Depository Receipt (GDR)?

A Global Depositary Receipt (GDR) is a bank certificate issued in multiple nations to purchase shares of a global corporation. GDRs are convertible securities that incorporate shares in at least two markets, most frequently the U.S. and the Euromarkets. It can be characterised as a form or bank document that reflects shares of a worldwide corporation insofar as the shares are held by a foreign branch of an international banking institution. The shares themselves are traded like domestic shares. However, they can be purchased globally at several bank locations. GDRs are used by private markets to raise cash backed by dollars or euros. GDRs are referred to as EDRs if private markets attempt to purchase euros instead of dollars.

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Features of a GDR

The features of Global Depository Receipts in India are given as follows:

• It is a negotiable instrument that can be freely traded like any other safety instrument.
• Indian organizations with a strong financial file of about three years are effectively allowed to enter into global financial markets via a GDR. However, clearances are required from the Foreign Investment Promotion Board (FIPB) and the Ministry of Finance.
• GDR is denominated in any distant places forex. Alternatively, the underlying shares would be denominated in the nearby overseas money of the issuer.
• The depository bank can convert GDRs into shares for trading on their home market.
• These receipts are financial instruments with a foreign currency value. The shares, however, are valued in the issuer of the deposit receipt’s home currency.
• The shareholders receive a bonus share and dividend from the underlying Global Depository Receipt.
• In a foreign agency, interest and redemption costs are disclosed.
• GDRs also may provide investors with the benefits and rights of the underlying shares, which could include voting rights and dividends.

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How are GDRs Used?

GDRs symbolize possessing an underlying quantity of shares of a distant business enterprise. They are frequently used to make investments in companies from creating or rising markets with the useful resource of investors in developed markets.

• Through a domestic custodian bank, Indian corporations issue their equity shares (in Indian rupees) to an international depository bank.
• The local custodian bank then represents the offshore depository bank and maintains control of the equity shares.
• After that, the foreign depository bank issues GDRs (in foreign currency). The bank subsequently changes the GDRs into shares that can be traded on the national stock exchange. Investors in the nation can purchase and sell shares exactly like they would any other security.

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Global Depository Receipts and India

The approach for issuing international depository receipts by means of any Indian company entails issuing rupee-denominated shares to a depository financial institution in every other country. The depository bank then gives GDRs in foreign money to international traders in trade for these shares.

Indian businesses can list their international receipts at Gujarat's International Financial Services Centre. Now, businesses 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 any other way permitted in the applicable jurisdiction. Additionally, businesses that intend to issue GDRs must first receive approval from the Foreign Investment Promotion Board and Ministry of Finance (FIPB).

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Trading of Global Depositary Receipt Shares

Companies issue GDRs to pique overseas investors’ interest. GDRs offer a less expensive method for these investors to participate. Although investors can buy these shares on a global market, they trade as though they are domestic shares. While the transaction is being processed, a custodian bank frequently takes control of the shares, providing safety for both parties while allowing participation.

During a transaction, the custodian bank often acquires ownership of the shares, providing security for all parties and simplifying the process for participants.

Brokers can also sell GDRs to investors if they so choose. They can either be converted into conventional stock for the company or sold as-is on the appropriate exchanges. They can also be cancelled and returned to the business that issued them.

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Advantages of Global Depository Receipts (GDRs)

The advantages of Global Depository Receipts are given as follows:

• The key benefit for GDR issuers is that their shares can reach a wider and more diverse audience of potential investors. Additionally, having their shares listed on well-known international exchanges can raise the stature or legitimacy of a foreign company that would otherwise be unknown.
• Depositary receipts are more practical and affordable than buying stocks on foreign exchanges.
• It offers clients an ordinary preference to diversify their portfolio internationally, barring opening overseas locations, brokerage money owed, or dealing with alternate rates.
• GDR broadens the company’s pool of shareholders.
• The Income Tax Act of 1961 treats the conversion of GDRs into shares as a transfer, and neither section 47 nor any other portion of that act exempts such a transfer.
• GDR is an investment. It is not subject to capital gains tax when a non-resident transfers GDRs of a listed firm to another non-resident outside of India.

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Disadvantages of Global Depository Receipts (GDRs)

The disadvantages of Global Depository Receipts in India are given as follows:

• Global Depository Receipts have poor liquidity, meaning there are few buyers and sellers, resulting in delays in entering and closing positions.
• GDR makeup with considerable administrative fees in some the circumstances.
• Investors still face economic risks due to the possibility of a recession, bank failures, or political unrest in the nation where the overseas company is based. As a result, any increased hazards in the foreign country would cause the value of the depository receipt to change.
• Dividends are paid in the home currency, which is prone to fluctuations in the foreign exchange market.
• Due to their ability to invest a large sum in GDR, High Net Worth Individuals (HNI), investors stand to gain the most from it.

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Example of GDR

A firm registered in the Indian Stock Exchange issues shares in a foreign land. It is termed as Global Depository Receipt. Example- Tata Steel issuing shares in the UK.

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Indian Depository Receipt (IDR)

Indian Depository Receipt (IDR) is an economic instrument that allows a foreign company to elevate funds in India. In an Indian Depository Receipt, a foreign company published depository receipts to the Indian investor. The first foreign Corporation to publish an IDR was the Standard Chartered Bank. These depository receipts are denominated in rupees. This is issued by a foreign firm that cannot go through the Indian listing process. It is believed to be beneficial for a foreign firm that wishes to share the risks and rewards of the offerings with the Indian shareholders.

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American Depository Receipts (ADRs)

ADR generally stands for American Depository Receipts, a type of negotiable instrument issued via a US Bank representing a precise variety of shares in a particular overseas employer that trades in US financial markets, which is quite significant. ADRs make it easy for US traders to purchase stock in foreign organizations.

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Difference between GDR and ADR

The differences between GDR and ADR are represented in a tabular format for better understanding.

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Conclusion

Global Depository Receipts (GDR) help in boosting global trade. Not only the number of stocks that are traded on domestic and international exchanges can be boosted but the exchange of information, market transparency, and technology can also be boosted at the same time.

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We hope all your doubts regarding the GDR are addressed after going through this article. Testbook provides comprehensive notes for different competitive examinations. It has always assured the quality of its product like content pages, live tests, Gk and current affairs, mocks, and so on. Ace your UPSC preparation with the Testbook App!