Global Depository Receipts

A Global Depository Receipt (GDR) is a financial instrument that allows investors to hold shares of a foreign company in international markets. It represents ownership of a company’s publicly traded equity and is issued by a depository bank outside the company’s home country. GDRs are typically denominated in major international currencies, such as the US dollar or euro, and are traded on foreign stock exchanges like the London Stock Exchange (LSE), Luxembourg Stock Exchange, or Singapore Exchange.
GDRs provide a convenient means for companies to access international capital and for investors to diversify their portfolios without dealing directly with cross-border regulatory and currency complexities.

Background and Concept

The idea of depository receipts originated to facilitate cross-border investment by simplifying the process of trading shares of companies listed in foreign markets. The American Depository Receipt (ADR), introduced in the United States in the 1920s, was the precursor to the GDR. With the increasing globalisation of financial markets in the 1980s and 1990s, the Global Depository Receipt evolved to enable companies from emerging markets to raise funds globally.
For instance, several Indian companies such as Infosys, Reliance Industries, and ICICI Bank have issued GDRs to attract international investors, particularly from Europe and Asia.

Structure and Mechanism

A GDR is created through a structured process involving multiple entities:

1. Issuing Company: A domestic company issues shares in its home market.
2. Custodian Bank: These shares are deposited with a custodian bank in the company’s home country.
3. Depository Bank: A foreign bank, known as the depository bank, issues GDRs against the deposited shares.
4. Investors: The GDRs are then listed and traded on international stock exchanges, allowing foreign investors to buy and sell them like regular equity instruments.

Each GDR represents a specific number of underlying shares (for example, one GDR may represent two or five equity shares). The price of the GDR is closely linked to the price of the underlying shares in the domestic market, adjusted for exchange rates and market conditions.
When investors purchase GDRs, they do not directly own the company’s shares but hold beneficial ownership through the depository bank. Dividends, voting rights, and other shareholder privileges are exercised through this intermediary.

Features of Global Depository Receipts

• International Accessibility: Enables foreign investors to invest in a company without dealing with domestic trading regulations.
• Denomination in Foreign Currency: Usually issued in freely convertible currencies such as USD or EUR.
• Listing on Foreign Exchanges: Commonly traded on exchanges in Europe or Asia.
• Underlying Security: Backed by ordinary shares held by a custodian bank in the home country.
• Transferability: Can be freely traded among investors in international markets.
• Dividends and Returns: Paid in foreign currency by the depository bank after converting domestic dividends.

Advantages for Issuing Companies

GDRs offer several benefits to companies seeking to expand globally:

• Access to Global Capital: Enables raising funds from international investors, diversifying funding sources.
• Enhanced Visibility: Improves corporate image and recognition in global markets.
• Broader Shareholder Base: Attracts institutional investors who may not directly invest in emerging markets.
• Foreign Currency Funding: Provides access to foreign exchange for financing imports, acquisitions, or expansion.
• Improved Liquidity: Increases demand for the company’s shares and enhances trading volume.

For example, Indian companies such as State Bank of India (SBI) and Larsen & Toubro (L&T) have used GDR issues to strengthen their global investor presence and finance international projects.

Advantages for Investors

• Ease of Investment: Allows investors to invest in foreign companies through familiar exchanges and trading systems.
• Diversification: Provides exposure to emerging markets and international industries.
• Reduced Regulatory Burden: Avoids complexities related to foreign market regulations, currencies, and tax systems.
• Dividends in Convertible Currency: Ensures returns in a stable and internationally accepted currency.

Risks and Limitations

While GDRs offer numerous advantages, they are not without risks:

• Exchange Rate Risk: Returns may fluctuate due to changes in currency exchange rates.
• Market Volatility: GDR prices depend on both domestic and foreign market conditions.
• Regulatory and Political Risks: Changes in foreign investment laws or political instability can affect returns.
• Limited Voting Rights: Investors may not have direct voting control in the issuing company.
• Liquidity Constraints: Depending on the exchange, GDRs may have lower trading volumes than domestic shares.

Regulation and Legal Framework

In India, the issuance of GDRs is governed by a combination of domestic and international regulations.

• The Companies Act, 2013, Foreign Exchange Management Act (FEMA), 1999, and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 regulate the domestic aspects of GDR issuance.
• The Ministry of Finance and Reserve Bank of India (RBI) oversee compliance with foreign exchange and capital account requirements.
• Internationally, the issuance must comply with the regulatory frameworks of the host country’s exchange and securities authority.

A company must obtain RBI and SEBI approvals and file the required documentation, including details of the issue size, purpose, and pricing. Proceeds raised through GDRs must be used in accordance with guidelines—commonly for capital expenditure, overseas acquisitions, or repayment of external debt.

Comparison with Related Instruments

While ADRs are specific to the US market, GDRs are internationally tradable. FCCBs, in contrast, are debt instruments that can convert into shares under certain conditions.

Procedure for Issuing GDRs

1. Board Approval: The company’s board approves the plan to issue GDRs.
2. Appointment of Intermediaries: Investment bankers, depository, and custodian banks are appointed.
3. Regulatory Approvals: Necessary permissions are obtained from SEBI, RBI, and the Ministry of Finance.
4. Filing of Offering Document: Disclosure documents are submitted to the foreign exchange where the GDRs will be listed.
5. Pricing and Allotment: GDRs are priced based on the market value of domestic shares and investor demand.
6. Listing and Trading: Once issued, the GDRs are listed on international exchanges and become available for trading.

Economic and Strategic Significance

GDRs contribute to the globalisation of capital markets by enabling cross-border capital flow. They help emerging market companies integrate with the global economy and improve access to international investors.
For countries like India, GDRs serve as a crucial mechanism for foreign capital inflow, supporting industrial expansion and infrastructure growth. They also strengthen the domestic financial system by enhancing transparency, governance, and investor relations.

Contemporary Developments

In recent years, GDR issuance has evolved in response to regulatory reforms and technological advancements:

• Electronic Settlement Systems: Modern depositories use digital platforms to streamline GDR trading and settlement.
• Dual Listing and Cross-Border Mergers: Companies increasingly use GDRs to facilitate dual listings and cross-border equity consolidation.
• Integration with ESG Investing: Global investors now assess environmental, social, and governance (ESG) performance when investing through GDRs.
• Shift towards Asian Markets: Exchanges in Singapore and Hong Kong have emerged as key hubs for GDR trading due to investor demand from Asia-Pacific regions.