Definition
A Global Depositary Receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company, as a method of trade on international stock markets. The shares are held by a foreign depositary bank and the receipts are traded. GDR allows investors to hold shares in the foreign company without dealing with complexities of foreign securities laws.
Phonetic
Global: /ˈɡloʊbəl/Depositary: /dɪˈpɒzɪˌtɛri/Receipt: /rɪˈsit/(GDR): /ˌdʒiː Diː ɑːr/
Key Takeaways
<ol><li>Global Depositary Receipt (GDR) is a bank certificate that is issued in more than one country for shares in foreign companies. These shares are then traded as domestic shares but are offered for sale globally through the various bank branches. This helps the companies to attract investment from foreign countries.</li><li>GDRs are often used by companies in emerging markets to raise capital in USD, Euros or other strong currencies. This allows these companies to avoid the barriers and regulations they would face attempting to list in foreign markets, while giving investors an easy way to invest in these companies and diversify their portfolios.</li> <li>Each GDR represents a specific number of shares in a company, and entitles the owner to all dividends and rights associated with the shares, except voting rights. The GDRs are often held by a depositary bank, which takes on the responsibility of handling dividends, communicating with the investors, and managing associated tasks.</li> </ol>
Importance
Global Depositary Receipt (GDR) is a critical finance term as it represents a significant mechanism for companies and investors to access and participate in global investment opportunities. GDR is a bank certificate issued in multiple countries for shares in foreign companies, enabling the companies to raise capital globally, while providing a flexible, efficient, and secure means for investors to own foreign shares. It bridges the gap between local and international markets by easing the process of buying, holding, and selling shares in foreign entities, thereby promoting cross-border investments. Hence, the importance of GDR lies in its role in enhancing global financial integration, enabling portfolio diversification and contributing towards the growth of emerging economies.
Explanation
The purpose of a Global Depositary Receipt (GDR) is to create a vehicle for individuals, companies, or investors to own shares in foreign companies without dealing with the complexities and regulations associated with investing overseas. Essentially, it’s a financial instrument used to make international trade of stocks simpler, more efficient, and more accessible to investors. Depository banks issue these certificates, denominated in the domestic currency, to represent a specific number of shares in a foreign company’s stock. The underlying shares are held by a foreign branch of an international bank.GDRs are used widely to raise capital in either domestic or international markets. They are especially useful to investors for portfolio diversification; by owning GDRs, they can invest in foreign enterprises and benefit from the growth prospects of emerging economies and sectors not available domestically. Another advantage of GDRs is that they face fewer regulations compared to direct foreign investments, therefore making it easier for investors to buy, hold, or sell. By offering GDRs, companies can attract foreign investors, enhance their corporate visibility abroad and expand their base of potential stakeholders.
Examples
1. Gazprom’s GDR Program: The world’s largest gas company, Gazprom, initiated their Global Depositary Receipt Program in 1996. They chose The Bank of New York Mellon as their depositary bank. Gazprom issued GDRs representing underlying shares of the company’s common stock which were traded on international exchanges, while the original shares were maintained in the Russian local market. This allowed global investors to buy these GDRs and get exposure to Gazprom’s equity without actually purchasing shares directly in Russia.2. ICICI GDR Listing: ICICI, one of the largest Indian banks, has listed its Global Depositary Receipts (GDRs) on the London Stock Exchange. This allows the bank to raise capital from investors globally, not just from local Indian investors. In addition, it provides an opportunity for foreign investors to invest in ICICI Bank, despite complexities involved in directly investing in the Indian market.3. Samsung’s GDR Program: Samsung, the South Korean multinational conglomerate, has used GDRs to attract foreign investors. Samsung’s GDRs are listed on the London Stock Exchange, allowing international investors to purchase these GDRs and indirectly own an interest in Samsung without having to navigate the regulations of the South Korean stock market.
Frequently Asked Questions(FAQ)
What is a Global Depositary Receipt (GDR)?
A Global Depositary Receipt is a bank certificate that represents a specified number of shares in a foreign company’s stock. GDRs allow investors to purchase shares of foreign companies in international markets.
Where are GDRs typically traded?
GDRs are typically traded, listed, and denominated in international markets, primarily on the London Stock Exchange and Luxembourg Stock Exchange.
Is the GDR itself a share?
No, a GDR is not a share. It is a financial instrument used by private markets in which a foreign company’s shares are represented.
How does one invest in GDRs?
To invest in GDRs, you can typically do so through a broker. It’s important to do proper research and consult with a financial advisor about the potential benefits and risks.
Do GDRs provide voting rights to investors?
Typically, GDR investors do not have voting rights. The depositary bank holds the voting rights attached to the underlying shares.
Are GDRs subject to the financial regulations of the issuing company’s home country?
GDRs are subject to the financial regulations of the country in which they are listed, not the home country of the issuing company. However, the financial health and performance of the underlying company can greatly influence the price of GDRs.
Why would a company issue GDRs?
A company might issue GDRs to attract attention from foreign investors, broaden their shareholder base, and to raise additional capital in international markets.
Do GDRs pay dividends?
Yes, if dividends are paid on the underlying shares, then GDR holders will also receive a dividend, usually in the currency of the country where the GDR is listed.
What are the risks of investing in GDRs?
Some of the risks associated with investing in GDRs include Exchange rate risk (The underlying shares are priced in the home currency of the foreign company), political risk, economic risk, and regulatory risk. It is important to note that investing in GDRs is considered more risky than investing in domestic securities.
Related Finance Terms
- Depositary Bank
- International Stock Exchange
- Emerging Market Securities
- Depositary Receipt
- Foreign Equity
Sources for More Information
