Imagine a well-established company in India wants to expand its business globally; for this, it needs a huge amount of capital. Instead of looking for it from Indian investors, it decided to raise it from global investors. Yes, you heard it right a company can raise money from global investors through Global Depository Receipt or GDRs.
In today’s blog post, we will give you a complete overview of GDRs, along with how they work and their benefits.
What is a GDR?
The GDR full form is Global Depository Receipt is a type of negotiable financial instrument which is issued by a depository bank and represents shares in a company based in another country. This allows companies to access international investors without requiring them to purchase and hold the underlying shares directly in the company’s domestic market. The depository bank does not hold the underlying shares directly; a domestic custodian bank in the issuing company’s country holds them. The GDRs can be listed on an international stock exchange and are traded by investors. GDRs are useful for companies that want to expand their investor base internationally.
Key Features of a Global Depository Receipt
The key features of Global Depository Receipts are as follows:
- International Trade: The GDRs can be traded on international stock exchanges, allowing companies to have access to international investors.
- Underlying Shares: Each unit of GDR represents a specific number of underlying shares that are held by a custodian.
- Foreign Currency Denomination: GDRs are commonly denominated in denomination of international currency such as USD due to this, the investors can easily participate in international market.
- Depository Banks: GDRs are issued by the depository banks, whereas the custodian in the company’s country holds the underlying shares.
How Does a Global Depository Receipt Work?
The Global Depository Receipt works in the following manner:
- Raising Funds: The first is that the company decides to raise funds to expand its business and for other purposes. For this, they issue GDRs to attract international investors.
- Depositing the Shares with Custodians: The shares of the company are held by the custodian bank in its home country.
- Issuing GDRs: An international depository bank issues the receipt representing the deposited shares, and each unit of GDR represents a specific number of underlying shares.
- Offering to Customers: The GDR receipts are offered to international investors through exchanges as they are listed on exchanges.
- Trading in GDR: The investors once the GDR are listed starts trading in them and get the return based on the performance.
- Receiving Funds: In case of a primary offering, the company receives the funds raised from investors after applicable expenses.
Global Depository Receipts Example
Let’s understand the GDR through an example. There is an Indian company named ABC Limited that wants to raise funds from international investors to expand its business. The company decides to issue GDRs through an international depository bank.
Consider each GDR represent 5 ordinary shares of ABC Limited, and the company issues 2 lakh GDRs at 20$ each.
| Particulars | Details |
|---|---|
| Number of GDRs issued by ABC Limited | 2 Lakh |
| Representation of shares by each GDR | 5 Shares |
| Total Number of Underlying Shares | 10 Lakh |
| Price per GDR | 20 USD each |
| Total raised fund | 40 Lakh USD |
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Benefits of a Global Depository Receipt for Investors
- Access to International Market: The key benefit of GDRs is that they allow investors to invest in companies operating in different countries.
- Diversification of Portfolio: GDRs allow an investor to diversify their investment across various companies and geographical regions. This reduces the dependency on a single country’s economic performance.
- Capital Appreciation: Investors can earn capital gains when the market price of GDRs increases after purchase. It can be influenced by the underlying company’s financial performance, market demand, economic conditions, etc.
Benefits of a Global Depository Receipt for a Company
The key benefits of GDRs for a company are as follows:
- Access to International Funding: The key advantage of GDRs for a company is that it can raise funds from international investors, which can be used for business expansion, debt repayments, etc.
- Improved Visibility: Companies listing GDRs on international markets can increase the company’s visibility among overseas investors; this allows them to build goodwill across the globe.
- Business Expansion: Companies can use the proceeds received from GDRs to expand their business, develop new products, strengthen operations, research and development, etc.
Limitations of a Global Depository Receipt
The key limitations of Global Depository Receipts are as follows:
- High Cost: Issuing GDRs involves significant cost that includes depository bank fees, legal charges, listing fees, compliance cost, etc. Hence, issuing GDRs is not possible for small companies.
- Liquidity Constraints: Not all traded GDRs attract investor attention, and lower trading volume may make buying and selling difficult for investors.
- Dependency on International Market: The GDR prices are highly influenced by the global economic conditions, interest rates, and geopolitical events; therefore, if the company is not performing well, it can put its GDR prices under pressure.
Difference Between GDR and ADR
The key differences between GDR and ADR are as follows:
| Particulars | GDR | ADR |
|---|---|---|
| Full Form | Global Depository Receipts | American Depository Receipt |
| Overview | Representing shares of a foreign company offered in the international market. | Shares of a foreign company issued in American markets only. |
| Market | All international markets, generally outside the US. | Issued only in the US market. |
| Currency | Can be issued in all currencies, including the US dollar. | Issued only in US dollars. |
| Depository Bank | Any international depository bank. | Only a US depository bank. |
| Listing | On any stock exchange in the world. | It is listed only on US stock exchanges. |
Important Points to Consider Before Investing in GDRs
The key factors that an investor should consider before investing in GDRs are as follows:
- Financial Performance: The financial performance of the company plays a key role in deciding the pricing of its GDRs. Therefore, before investing, one must check the company’s revenue, profitability, cash flows, debt level, etc.
- Currency Exchange Rates: GDRs are traded in foreign currency, whereas their underlying shares may be denominated in another currency. Hence, the exchange rate can impact the value of the investment and its returns.
- Liquidity: Before making any investment in GDRs, one is required to check the liquidity, as low trading volume makes it difficult for buyers and sellers to execute their trades.
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Conclusion
On a concluding note, Global Depository Receipts allow a company to easily raise funds from the foreign market and to explore opportunities beyond its home country. Investment in GDRs offers various benefits such as access to global investing, capital appreciation, dividend income and portfolio diversification. However, GDRs also come with certain risks, including volatility, currency risk, liquidity risk, and higher costs. Therefore, it is advisable to consult your investment advisor before making any investment in GDRs, as it also carries risk.
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Frequently Asked Questions (FAQs)
What is the full form of GDR?
GDR refers to a Global Depository Receipt, which is a financial instrument issued by a depository bank representing a share of a company based in another country.
Name the Indian companies issued GDR?
The Indian companies that have issued GDRs are Reliance Industries Limited, Larsen and Toubro Limited, Tata Steel Limited, Mahindra and Mahindra Limited, etc.
Can an Indian company issue more than one GDR?
Yes, an Indian company can issue more than one GDR in different countries and at different times depending on its needs.
Can an investor earn a dividend from a GDR?
Yes, investors may receive dividends distributed by the companies issuing GDRs.
What is the objective of issuing a GDR by companies?
GDRs are issued by companies to raise capital from international investors. Through this, investors can directly purchase the shares of foreign companies on their domestic exchange.
