What is a Global Depositary Receipt (GDR)?

Global depositary receipts (GDRs) are financial instruments that enable companies to issue their shares in other countries and raise capital in international equity markets. It is a negotiable instrument of a bank that contains the number of shares owned in a foreign corporation. GDRs are actively traded in major international stock exchanges such as the London Stock Exchange or Luxembourg Stock Exchange. Some investors purchase GDRs instead of purchasing shares of foreign companies without physically buying the foreign equities. In this blog, we will explore what is global depository receipts, its advantages, characteristics, and more in detail.

Global Depositary Receipts Example

Now that you know the global depository receipts meaning, let’s look at a global depository receipts example for a better understanding. 

Suppose an Indian company can get its shares listed on the London Stock Exchange to raise capital in Europe and issue GDRs. The GDRs based on an Indian company that has been listed on the London Stock Exchange can be purchased by UK investors. They can gain exposure to the Indian company without buying the shares directly from the Indian market.

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Global Depository Receipts Procedure

After understanding what is global depository receipts below, you must be aware of the steps and institutions involved in issuing Global Depository Receipts (GDRs). Here is how the process works step by step.

• Shares: Foreign companies issue the shares in Indian Rupees and transfer them to a Domestic Custodian Bank. For Indian Companies, the AUD is transferred in an INR equivalent amount of Capital­-in-Fill-up Form.
• Role of Custodian Bank: The domestic custodian bank holds the equity shares physically and acts as the agent for the overseas depository bank. In the company’s records, the depository bank is listed as the owner of the shares, and the voting rights of the equity shareholders are passed on to the depository bank.
• Issuance of GDRs: These equity shares are received by the overseas depository bank, which then issues GDRs in foreign currencies. Following that, these GDRs are listed for trade on global stock markets, providing access to shares of the issuing business for overseas investors.
• Trading of GDRs: The sale and acquisition of GDRs is handled by brokers, who typically operate globally yet are nationals of the issuing business. Investors in foreign markets can buy or sell GDRs, like any other security.
• Conversion or Sale: Investors holding GDRs can sell them on exchanges or choose to convert them into regular equity shares of the company. If required, GDRs can also be cancelled and returned to the issuing company.

Characteristics of Global Depository Receipts

The following are some key characteristics of global depository participants.

• Issuing Entities: GDRs are issued by financial institutions or banks on behalf of foreign companies seeking to raise funds from global markets.
• Global Trading: They provide investors with a simpler way to invest in foreign companies without having to deal with the difficulties of international markets because they are traded on a number of international stock exchanges.
• Ownership Representation: The issuing bank or financial institution owns the underlying shares of a GDR, which represents ownership in a foreign company.
• Currency Denomination: They are frequently available to foreign investors because they are issued in major currencies such as US dollars or euros.
• Dividend Rights: GDR holders have the right to receive dividends and other benefits linked to the underlying shares.
• Convertible into Shares: GDRs can be converted into the corresponding shares if the investor chooses to do so.
• Regulatory Compliance: GDRs must adhere to regulations in both the issuing country and the international market where they are traded.

Advantages and Disadvantages of Global Depository Receipts

The table below shows the advantages and disadvantages of global depository receipts. 

Conclusion
Global Depository Receipts (GDRs) offer investors an easy method to make suitable international investments and give businesses a smooth means of raising funds abroad. It's critical to comprehend what is global depository receipts receipts in order to facilitate exposure to multinational companies while avoiding the challenges associated with transacting with foreign stock exchanges. To quickly access GDRs and other foreign securities in order to diversify your investments abroad, you can do so by using an online trading app.