Global depositary receipt
Global depositary receipt (GDR) is a negotiable financial instrument issued by a depositary bank that represents ownership of shares in a foreign company. Global depositary receipts enable companies to raise capital and provide investors with access to foreign securities through trading on international stock exchanges without requiring direct ownership of the underlying shares in the issuer's domestic market. Each GDR represents one or more underlying shares held in custody by a custodian bank in the issuer's home country.
Global depositary receipts are generally denominated in a widely traded currency, such as the United States dollar or the euro, and are listed on one or more international securities exchanges. They facilitate cross-border investment by allowing investors to trade foreign companies' securities through familiar market infrastructure while reducing many of the operational and administrative complexities associated with investing directly in overseas markets.
GDR programs are commonly established by companies seeking access to international capital markets beyond their domestic stock exchange. The depositary bank issues the receipts after the underlying shares have been deposited with a custodian bank. Investors who purchase GDRs acquire economic interests in the underlying shares, including entitlement to dividends and certain other shareholder benefits, subject to the terms of the deposit agreement and applicable laws.
Global depositary receipts are widely used by institutional investors, investment funds, multinational corporations, and international portfolio managers because they improve market accessibility, liquidity, and cross-border capital formation.
History
Global depositary receipts were developed to facilitate international investment and enable companies to raise capital from investors outside their home markets.
During the late twentieth century, the expansion of global capital markets led many companies from emerging and developed economies to establish GDR programs to broaden their investor base and improve access to international financing.
Today, GDRs remain an important mechanism for cross-border equity issuance and international portfolio investment.
Objectives
The principal objectives of global depositary receipts are to:
- facilitate cross-border investment;
- expand access to international capital markets;
- increase market liquidity;
- diversify the shareholder base;
- simplify international securities trading;
- support capital formation.
These objectives promote greater integration of global financial markets.
Structure
A typical GDR program involves:
- the issuing company;
- a depositary bank;
- a custodian bank;
- the underlying ordinary shares;
- international investors.
The custodian bank holds the underlying shares, while the depositary bank issues the corresponding GDRs.
Operation
The operation of a GDR generally involves the following steps:
- a company deposits ordinary shares with a custodian bank in its home jurisdiction;
- the depositary bank issues GDRs representing those shares;
- the GDRs are listed on one or more international securities exchanges;
- investors buy and sell the GDRs through the exchange;
- dividends and certain shareholder rights are passed through the depositary bank to GDR holders in accordance with the deposit agreement.
Example
Suppose ABC Corporation, incorporated in India, wishes to attract international investors.
The company deposits 10 million ordinary shares with a custodian bank in India.
A depositary bank issues 5 million GDRs, with each GDR representing 2 underlying ordinary shares.
International investors purchase the GDRs on an overseas stock exchange while the underlying shares remain held in custody in India.
Relationship with depositary receipt
A GDR is a type of Depositary receipt.
While all GDRs are depositary receipts, not all depositary receipts are global depositary receipts.
Relationship with American depositary receipt
American depositary receipts (ADRs) are generally listed and traded in the United States.
Global depositary receipts are designed for trading in international markets and may be listed on exchanges outside the United States or on multiple exchanges simultaneously.
Relationship with depositary bank
The depositary bank administers the GDR program.
Its responsibilities generally include:
- issuing and cancelling GDRs;
- maintaining shareholder records;
- distributing dividends;
- administering corporate actions;
- facilitating communications between the issuer and investors.
Relationship with custodian bank
The custodian bank holds the underlying shares on behalf of the depositary bank.
It safeguards the securities and supports the operation of the GDR program within the issuer's home jurisdiction.
Relationship with stock exchange
Global depositary receipts are generally traded on one or more stock exchanges.
Exchange trading provides:
- price discovery;
- market liquidity;
- regulatory oversight;
- transparent trading.
Relationship with securities market
GDRs form part of the broader Securities market.
They enable companies to access international investors while allowing investors to gain exposure to foreign companies through established securities markets.
Applications
Global depositary receipts are widely used for:
- international equity offerings;
- cross-border capital raising;
- institutional investing;
- portfolio diversification;
- emerging market investment;
- international portfolio management.
They provide an efficient mechanism for accessing foreign equity markets.
Advantages
Global depositary receipts provide several important benefits.
They facilitate international capital raising, broaden the investor base, improve market liquidity, simplify cross-border investment, reduce administrative complexity, and provide investors with access to foreign companies through familiar trading and settlement systems.
They also enable companies to enhance their international visibility and access global sources of capital.
Limitations
Global depositary receipts remain subject to market risk, currency risk, regulatory differences, political risk, and changes in the legal or tax environment of the issuer's home jurisdiction. Investors may also be subject to fees charged by depositary banks, and shareholder rights may differ from those of holders of the underlying ordinary shares.
Liquidity may vary depending on the trading activity of the specific GDR program.
Importance
Global depositary receipts are an important instrument of international finance because they facilitate cross-border investment and enable companies to access global capital markets without relocating their primary stock exchange listing. By improving market accessibility, liquidity, and international capital formation, GDRs contribute significantly to the integration and efficiency of global securities markets.