GDRs can be defined as financial instruments that allow investors to invest in companies that are listed abroad without having to directly operate in their domestic stock market.
Global investing can be a complex process that involves various compliance issues, procedures and other practical considerations. GDRs can be described as financial instruments designed to give investors access to foreign companies through securities listed on international exchanges.
In simple terms, these instruments allow to invest in overseas equities without the need to work directly with the domestic market of the issuer. Knowledge about the concept, features and risks of GDRs can help investors to better understand them when considering investment in foreign assets.
How Do Global Depository Receipts Work?
Issuance of GDRs can be quite a complex process, involving the cooperation of depository bank, custodian institution and other participants and institutions.
Let’s consider how the whole process takes place in simple steps.
Step 1 – Corporate Authorities’ Approval
Generally, the first step would be getting approval from the corporation’s board of directors to proceed with GDRs issuance.
Issuing the securities will be possible only in case if the company complies with all applicable domestic laws on the issuance of securities to foreign investors.
Step 2 – Delegation to the Depository Bank
The next step will be delegating the authority of the issuance of GDRs to the selected depository bank.
Delegation can happen through appointment of the depository bank by the issuer of the securities.
The depository bank will act as an intermediary between the issuer and the international investors.
Step 3 – Depositing Underlying Shares to the Custodian Institution
At the next step the issuer of the securities will deposit the underlying shares to the designated custodian institution, which belongs to the home jurisdiction of the issuer.
The custodian institution will act as an agent for the depository bank.
Step 4 – Issuing GDRs
After the above mentioned actions were completed, at the next step the depository bank will issue GDRs.
Each GDR represents some number of underlying shares.
Step 5 – Trading & Settlement
Finally, at the last step the GDRs will be traded on the international stock exchanges.
Investors will be able to buy or sell GDRs on the international exchanges.
What Are Key Characteristics of GDRs?
Knowing the basic features of GDRs can help to better understand the instrument itself.
Here we can highlight the following features of Global Depository Receipts.
Negotiability
As stated above, GDRs are negotiable financial instruments and therefore they can be traded on recognized exchanges.
Underlying Share Ratio
It is important to note that one GDR does not necessarily represent one underlying share.
Instead, the depository bank determines the conversion ratio according to the price considerations and market requirements.
Standardized Currency
Generally, GDRs are denominated in internationally accepted currencies like:
- USD
- EUR
- GBP
GDRs vs ADRs: Key Differences Explained
Even though GDRs and ADRs serve similar purposes, there are differences between these two types of financial instruments.
Comparative Analysis
| Parameter | GDRs (Global Depository Receipts) | ADRs (American Depository Receipts) |
|---|---|---|
| Primary Market | International markets (outside the US) | United States |
| Examples of Exchanges | London Stock Exchange, Luxembourg Stock Exchange | NYSE, NASDAQ |
| Regulatory Authority | Local listing authorities of the respective country | U.S. Securities and Exchange Commission (SEC) |
| Trading Currency | USD, EUR, or GBP (depending on the exchange) | USD |
| Target Investors | Global investors | U.S. investors |
| Listing Scope | Can be listed in multiple international markets | Listed only on U.S. stock exchanges |
What Is the Difference Between ADRs and GDRs?
As we can see from the above table, GDRs are different from ADRs as they are not issued in the USA but instead are issued in international financial centers and they can be governed by the rules of the listing exchange and local regulatory authorities.
Global Depository Receipts vs Shares: Which One to Choose?
Another option for foreign investing can be shares themselves.
However, even though shares and GDRs can seem very similar, they actually are different from each other.
Here we can see comparative overview of the two.
Comparative Analysis
| Parameter | GDR (Global Depository Receipt) | Foreign Shares |
|---|---|---|
| Ownership Structure | Beneficial ownership through a depository | Direct ownership by the investor |
| Voting Rights | Depends on the depository agreement | Retained by the shareholder/investor |
| Brokerage Account | Domestic brokerage account is usually sufficient | International brokerage account may be required |
| Foreign Exchange | Currency conversion is built into the trading process | Additional foreign exchange conversion is required |
What Is the Difference Between GDR and Foreign Shares?
We can see that even though shares and GDRs represent ownership interest in the shares of some corporation, these two instruments are quite different.
GDR vs FPI vs FDI: What Is the Difference?
Foreign investments can be categorized as FPI or FDI.
The classification of foreign investments is made in order to distinguish between these two types of investment.
Definition of FDI and FPI
Here are definitions of foreign direct investments and portfolio investments.
FDI – strategic ownership or control over foreign business.
FDI can involve establishment of foreign operations or acquisition of controlling interest in some foreign company.
FPI – investments in the form of marketable securities without obtaining any managerial control over the company.
What Type of Investment Is GDR?
A Global Depository Receipt (GDR) is an equity-based investment instrument that represents shares of a company traded on international stock exchanges. It enables investors to invest in foreign companies without directly purchasing shares in their home market, making cross-border investing simpler and more accessible.
Advantages of GDRs for Investors
Even though issuance of GDRs can be quite complicated procedure, there are certain advantages that investors may see from using GDRs.
Access to Foreign Equities
Through the issuance of GDRs investors will be able to invest in foreign stocks without direct access to foreign market.
Geographic Diversification
Investing in GDRs will provide geographic diversification of the portfolio.
Trading Through Established Exchanges
Most of the GDRs can be traded on the recognized exchanges with established trading and settlement mechanisms.
Access to the Price Information
Investing in GDRs will provide investors with the access to market-based price information as GDRs are traded on exchanges.
Of course, GDRs can suit the particular investor’s needs in terms of geographic exposure or diversification.
Risks of Investing in GDRs
Of course, apart from the advantages there are certain risks involved in the process of investing in GDRs.
These risks can be seen below.
Currency Risk
Even though GDRs are denominated in internationally accepted currencies, the operations of the underlying company still happen in the domestic economy of the issuer.
That is why the movements of exchange rates can have significant effect on the valuation and return on investment.
Liquidity Risk
Some GDRs might have lower liquidity compared to the underlying stocks and, therefore, might suffer from higher bid-ask spreads.
Regulatory Risk
Changes in the domestic or international regulations can have influence on the trading, disclosure and accessibility of the GDRs.
Political Risk
Political risk can also affect performance of GDRs as the performance of the issuing company is directly connected to the macroeconomic environment.
Issuer-Specific Risk
The performance of the company, the profit growth and governance of the company are also important risk factors in the process of investing in GDRs.
GDR Real-Life Examples
As discussed before, Global Depository Receipts have been widely used by companies from emerging markets to gain access to international capital markets.
India has traditionally been one of the major sources of GDR issuance.
Companies from India have issued GDRs in order to obtain more investors and to access the international market.
Future of Cross Border Investing
Cross-border investment activity will continue evolving together with development of financial market infrastructures and regulatory harmonization of the financial markets.
Future of cross border investments will be influenced by all these factors as well.
GDRs will probably stay on the list of instruments that will allow investors to access global equity markets.
Conclusion
Global Depository Receipts are one of the most important instruments that allow companies to gain access to international capital and investors to access foreign companies through financial instruments.
While providing access to foreign companies, GDRs can reduce certain complexities of foreign investing.
Of course, like all instruments, GDRs are associated with certain risks.
Frequently Asked Questions (FAQs)
Are GDRs Tradable on Stock Exchanges?
Yes, GDRs can be traded on international stock exchanges.
What Is the Difference Between ADRs and GDRs?
The main difference is that GDRs are usually issued on international exchanges while ADRs are usually issued in the United States.
Is GDR Considered FPI?
Yes, GDRs can be considered as FPIs because of lack of managerial control over the issuing company.
What Are the Main Risks Associated With GDRs?
- Currency risk
- Liquidity risk
- Regulatory risk
- Political risk
- Issuer-specific risk
Do GDR Holders Have Voting Rights?
Depends on the depository agreement and the terms of the issuance of GDRs.
Can GDRs Be Used for Portfolio Diversification?
Yes, because GDRs give investors the opportunity to invest in companies from different countries/sectors.
Disclaimer
This article is for informational and educational purposes only and does not constitute investment, financial, legal or tax advice. Investments in Global Depository Receipts (GDRs) are subject to market, currency and regulatory risks. Investors should conduct their own research and consult a qualified financial advisor before making any investment decisions.
