Global Depository Receipts: Advantages, Disadvantages, and Key Differences from ADRs and IDRs

Global depository receipts are one of the most important instruments of the world financial system. These instruments give investors a possible method to enter foreign markets-that is to say, they create a bridge between investors and foreign companies. They make investments between the investor and the foreign company easy to accomplish without any complexities regarding direct foreign stock transactions.

This article presents the concept of global depository receipts meaning, its advantages, and the way these depository receipts differ from other types, such as American Depository Receipts and Indian Depository Receipts. Also, this article highlights the procedure followed in GDR, associated risks, and significant advantages.

What is Global Depository Receipts?

A global depository receipts meaning is a paper issued by a depositary bank to represent shares of a foreign company. Such receipts are traded on local stock exchanges, so investors can invest in foreign firms without the hassles involved in directly trading on foreign stock exchanges.

A GDR is typically issued by a company looking to expand its capital and thus expand it from international investors. For this reason, investors enjoy holding a percentage of the equity of a foreign company that is held in its native form by the depositary bank.

Global Depository Receipts vs American Depository Receipts

Although Global depository receipts and American Depository Receipts in stock market are the same, they differ regarding market location and some form of regulation compliance.

GDRs, hence, provide companies with much more flexibility to cater towards a much larger international market, whereas ADRs are only confined to the U.S. market. American Depository Receipts in the stock market perform very well for companies looking to attain exposure in the U.S. In contrast, GDRs are more suitable for those companies and firms looking for a much deeper international presence.

Characteristics of Global Depository Receipts

GDRs have the following important features:

1. Negotiable Instrument: GDRs are negotiable. They can, therefore, be freely bought and sold on stock exchanges like common stocks.
2. Underlying Shares: Each GDR represents a specific number of shares in the foreign company. Such shares are held by a depositary bank on behalf of the GDR holders.
3. Denomination Currency: GDRs are issued mainly in U.S. dollars; however, they can be issued in other currencies also.
4. No Voting Power: The Global depository receipt holders do not possess voting power in the issuing company like the share owner shares his stocks. However, the shareholders get the voting power as they are the actual owners of the stocks.
5. Dividend Payments: The dividends paid by the foreign company are converted into the denomination currency of the GDR through the depositary bank and passed on to the GDR holders.

Benefits of Global Depository Receipts

To the investors using global depository receipts in their portfolios, there are various benefits:

1. Access to Foreign Markets: GDRs offer an investor the possibility of accessing foreign markets and, thus, refrain from taking the bothersome procedure of dealing with various regulatory and trading environments of a foreign country.
2. Diversification: An investor can diversify their portfolio by including foreign companies, and therefore being able to stay further away from risks that are associated with the domestic markets.
3. Liquidity: GDRs trade on leading stock exchanges with high liquidity that makes it easier to sell and buy.
4. Simplified Transactions: Investors can trade in GDRs in the same way as in the local stocks and avoid the knotty aspects of trading in a foreign market.

How Global Depository Receipts Work?

There are a number of key steps involved in the issuing process of global depository receipts:

1. Choice of Depositary Bank: The issuing company identifies an international depositary bank to administer the entire process of GDR issuance.
2. Underlying Shares: The company deposits shares with the depository bank. The depository bank keeps the shares in trust for owners of the GDRs.
3. Issuance of GDRs: The issuance of GDRs by the depository bank for representing the ownership of these underlying shares, and it issues receipts that sell on various international stock exchanges.
4. Trading of GDRs: GDRs can be traded like any other ordinary shares at the investors’ home stock exchanges. Foreign investment is thus more accessible.
5. Dividend Payments: The dividend paid by the foreign company is transferred to the currency in which the GDR is issued and distributed to the holders by the depositary bank.

Risks associated with Global Depository Receipts

Despite holding lots of benefits, global depository receipts are not risk-free absolutely:

1. Market Risk: The price of GDRs keeps fluctuating with the performance of the underlying foreign company.
2. Currency Risk: GDRs are generally denominated in foreign currencies, so there is a risk of exchange rate change, which threatens returns in case the investor’s home currency appreciates against that of the GDR.
3. Political and Economic Risks: As a foreign company operates based on the political and economic conditions prevalent in the country where it operates, any political economic instability of the issuing firm’s home country could have an influence on the value of GDRs.

Global Depository Receipts in India

Global depository receipts have received a welcome in India as a much sought-after means of raising capital by firms based overseas. The receipts permit Indian investors to spread their portfolios when investing in a foreign company without having to open up an account elsewhere around the globe.

What is Indian Depository Receipt?

A GDR is, in general, similar to an IDR but is an instrument that has been conceived specially for the Indian market. It allows Indian investors to invest in foreign companies without buying shares listed on foreign exchanges; they are maintained in the account of the foreign company, which issues IDRs for trading on Indian exchanges. The IDR represents ownership of a part of the foreign company’s equity.

It was only in 2010 that the first IDR was floated by Standard Chartered Bank, with sort of a precedent set in raising funds from the Indian market for other foreign companies.

Conclusion

Another area where global depository receipts come in handy is sourcing capital from foreign investors and for investors to reach international markets. It is valuable for investors who wish to diversify portfolios in companies abroad without the hassles of foreign stock trading among the more significant risks include market volatility and currency risk, among others.

Those interested in knowing what a global depository receipt is or what is global depository receipt, what is Indian depository receipt and interested in exploring the opportunities of American Depository Receipts or Indian Depository Receipts can do well by consulting SMC Global Securities in that regard. It will be helpful in making the right choices with international investments and mitigating some risks.

FAQs About Global Depository Receipts (GDRs)

1. What is Global Depository Receipts (GDR)?

A GDR is an instrument issued by a depositary bank as a representation of shares of a foreign company. GDRs provide the means to invest in companies located abroad with the conveniences that are steered clear of when dealing directly with foreign stock deals. As GDRs trade on a local stock exchange, it does expose investors to foreign equities.

2. How does GDR compare with ADR in stock market?

However, the two instruments differ in the market focus and regulatory requirements. GDRs can be traded in many global markets, while American Depository Receipts are more focused on U.S. markets. Moreover, GDRs are issued by international banks, and ADRs are issued by U.S. banks.

3. What are the benefits of investments in global depository receipts?

Some investment benefits derived through GDRs include:

• Access to Foreign Markets: GDRs permit investors to gain access to the holdings of a foreign company without the complexities of directly buying a foreign stock.
• Diversification: GDRs provide an investor with the opportunity to introduce foreign companies into his portfolio, thus reducing risk exposure from the risks of the local market.
• Liquidity: The GDRs are traded on any of the major stock exchanges hence suitably liquid
• Easier Transactions: GDRs can be traded as local equities thus easier for investors.

4. What are the risks associated with global depository receipts?

Investment in GDRs carries the following risks:

• Market Risk: GDRs vary with the actual performance of the foreign company.
• Currency Risk: GDRs are quoted in the currency of a foreign country, which further affects the returns in terms of fluctuations in the exchange rate.
• Political and Economic Risks: The performance of the foreign company is usually determined by the political and economic conditions of the home country.

5. How do I buy GDRs?

To invest in GDRs, one requires expertise by entering into an agreement with a seasoned broker or a financial advisor who has knowledge about international investment. He can help the investor choose between the advantages and disadvantages of GDRs and will further assist him in the entire course of investment.

Author: All Content is verified by SMC Global Securities.