What is Global Depository Receipts (GDRs)?

A Global Depository Receipt (GDR) is a financial instrument used by companies to access international capital markets. It allows a company to raise funds from investors outside its domestic market through internationally traded depository certificates.

For Indian companies, GDRs can provide access to foreign investors and international sources of equity capital. The underlying securities remain connected to the company’s shares through depository and custodian arrangements.

GDRs may be offered in the US through private placements to qualified institutional buyers under SEC Rule 144A, where applicable; they are not restricted to this route.

GDRs can be listed on international exchanges, including European exchanges such as the London Stock Exchange or the Luxembourg Stock Exchange, subject to the applicable listing requirements.

This comprehensive guide explains what GDRs are, how they work, their features, advantages, risks, how to invest, and the factors to consider.

What is a Global Depository Receipt (GDR)?

A Global Depository Receipt is a negotiable certificate issued by an overseas depository bank. It represents a specified number of underlying shares issued by a company in another country.

An Indian company can deposit its eligible shares with an Indian custodian. An overseas depository then issues GDRs representing the underlying shares, against which the shares held with the custodian are pledged.

The GDR can be listed and traded on an international stock exchange. London and Luxembourg have historically been important markets for GDR listings by companies from emerging economies.

For investors, one GDR may represent one underlying equity share or several shares. The exact ratio depends on the terms established for the particular GDR programme.

GDRs are different from direct ownership of shares on an Indian Stock Exchange. The investor owns the depository receipt, while the underlying shares remain held through the custodian and depository structure.

GDRs help bridge domestic companies with international investors. They can therefore support cross-border capital raising without every foreign investor having to directly access the domestic market.

How Does a GDR Work?

The GDR structure involves several participants, including the issuing company, domestic custodian, overseas depository, and investors. Here is the process to understand the working of GDRs:

• Step 1: Company decides to raise international capital

The Indian company evaluates international funding requirements and decides whether GDR issuance fits its capital strategy.

• Step 2: Regulatory requirements

The company follows applicable SEBI, FEMA, Companies Act and other regulatory requirements before proceeding with a depository receipt issue.

• Step 3: Shares are deposited with a custodian

The underlying shares of Indian companies are placed with a domestic custodian according to the GDR programme structure.

• Step 4: Overseas depository issues GDRs

The overseas depository issues GDR certificates representing the underlying shares held with the domestic custodian.

• Step 5: GDRs listed on Global Stock Exchanges

The GDRs may be admitted for trading on an overseas exchange according to its listing requirements.

• Step 6: Investors purchase GDRs

International investors purchase and sell GDRs through the overseas market instead of directly purchasing Indian shares.

• Step 7: GDR price changes

GDR prices fluctuate according to demand, company performance, currency movements, global sentiment, and underlying share prices.

• Step 8: Conversion can occur

Subject to applicable rules, GDR holders may surrender receipts and receive underlying shares through the prescribed conversion mechanism.

Key Features and Characteristics of GDRs

Here are some important features of Global Depository Receipts:

• International Accessibility:

GDRs allow companies to reach international investors by listing securities on recognised overseas stock exchanges.

• Currency Denomination:

GDRs are generally denominated in widely accepted foreign currencies, making international transactions easier for investors.

• Custodian Bank Role:

A custodian bank holds underlying shares securely and facilitates the issuance and settlement of GDRs for investors.

• Liquidity:

GDRs provide investors with an opportunity to trade company securities internationally, although liquidity varies with market demand and trading volume.

• Diversified Investment:

GDRs can provide geographic diversification by providing exposure to companies through international financial markets and currencies.

• Simplified Process:

GDRs simplify cross-border investing by allowing investors to trade depositary receipts rather than directly holding the underlying shares in the domestic market.

Difference Between GDR and ADR

GDRs and ADRs are both forms of depository receipts representing shares of companies incorporated outside the market where the receipts are traded. However, the principal difference relates to the market where the receipts are offered and traded. Here are the other differences:

How to Invest in GDRs from India?

Indian residents looking to invest in GDRs, which are considered securities traded outside India, must comply with foreign exchange regulations and permitted investment routes.

A resident investor should verify whether the specific GDR and proposed transactions are permitted under current regulations.

Here is the process to invest in GDRs from India:

• Check the GDR availability:

Check that the desired company’s GDR is listed, tradable and accessible through an authorised intermediary or brokerage platform permitted to provide access to the relevant overseas market.

• Check RBI regulations

Verify that the proposed overseas investment complies with current FEMA and RBI requirements applicable to resident individuals.

• Understand the LRS framework

Where applicable, check whether the investment and related remittance can be made under the Liberalised Remittance Scheme and whether it remains within the applicable annual limit.

• Brokerage account

Use a compliant platform that provides access to the international exchange where the relevant GDR trades.

• KYC documentation

Complete identity, tax, bank, and other documentation required by the brokerage and financial intermediaries.

• Foreign Remittance

Transfer funds through an authorised banking channel while complying with applicable foreign exchange and remittance requirements.

• Research the GDR

Compare the GDR price to its underlying Indian shares, accounting for the conversion ratio, currency movements, liquidity, and company fundamentals.

• Order placement

Select the required quantity and place a limit or market order according to the available trading facilities.

• Monitor investment

Track the GDR price, underlying share price, exchange rate, company announcements, and international market developments.

• Tax Compliance

Maintain transaction records and check the applicable Indian tax provisions before reporting capital gains or other overseas investment income.

Advantages of GDR for Companies

Here are the key advantages of GDRs for companies:

• Access to global capital

GDRs allow companies to approach international investors and diversify their sources of equity capital.

• Wider investor base

Companies can reach international institutions and investors beyond their domestic shareholder base.

• International visibility

An international listing can increase corporate visibility among overseas investors and financial institutions.

• Foreign currency funding

GDR issuance can provide access to capital denominated in internationally traded currencies.

• Potential valuation benefits

Broader investor participation may improve liquidity and demand, although any effect on valuation depends on market conditions and company-specific factors.

Risks Involved in GDR Investments

Despite several advantages, there are some risks involved in GDR investments:

• Currency risk

Exchange rate movements can affect the rupee value of an investment even when the underlying company performs well.

• Market risk

GDR prices can decline because of global economic conditions, company results, interest rates, or investor sentiment.

• Liquidity risk

Some GDRs may have limited trading volumes, making purchases or sales difficult during volatile markets.

• Regulatory risk

Changes in Indian or overseas regulations can affect trading, conversion, taxation, or ownership conditions.

• Price difference risk

GDR prices may temporarily diverge from underlying Indian shares because of currency rates, market hours, and demand differences.

Factors to Consider Before Investing in GDRs

Here are some important factors to consider before investing in GDRs:

• Underlying valuation

Compare the GDR with the Indian share after adjusting for the applicable GDR-to-share conversion ratio.

• Exchange rate

Analyse the relevant foreign currency against the Indian rupee because currency changes can influence investment returns.

• Trading liquidity

Check trading volume, bid-ask spreads, and market depth before trading a GDR.

• Company fundamentals

Study revenue growth, profitability, debt, cash flows, competitive position, management quality, and other relevant company-specific factors.

• Regulatory and tax rules

Understand FEMA, RBI, taxation, remittance, disclosure, and overseas market requirements before entering into a GDR transaction.

Role of GDR in International Capital Markets

GDRs play an important role in connecting domestic companies with international capital markets and overseas investors. GDRs enable companies to raise equity capital from investors located outside the domestic markets.

This helps businesses diversify their funding sources and reduce dependence on domestic capital. GDRs also support market integration by connecting domestic shares with international trading venues through depository and custodial arrangements.

Companies can access foreign-currency capital while increasing their visibility among international institutional investors. For investors, GDRs provide an opportunity to gain exposure to companies through internationally traded securities.

GDR trading can also contribute to price discovery by reflecting global investor expectations and market sentiment. Companies seeking international expansion can use funds raised through GDRs for acquisitions, infrastructure development, technology investment, business expansion, and debt management.

However, companies must consider regulatory requirements, issuance costs, disclosure obligations, and investor expectations when using GDRs.

FAQs

• What is a GDR in the share market?

A GDR is a negotiable financial instrument representing shares of a company and traded in international markets.

• How does a GDR work?

A foreign depository bank issues GDRs against underlying company shares held by a custodian bank, allowing investors to trade them internationally.

• What is the difference between GDR and ADR?

GDRs can trade in international markets, while American Depository Receipts or ADRs, are specifically designed for trading in the United States markets.

• Can Indian investors invest in GDRs?

Indian residents may invest in eligible overseas securities through permitted channels, subject to applicable RBI, FEMA, tax, and foreign investment regulations.

• What are the main risks of investing in GDRs?

GDR investing involves currency fluctuations, market volatility, liquidity limitations, regulatory changes, and potential price differences from the underlying shares.

• Why do Indian companies issue GDRs?

Indian companies issue GDRs to access international capital, attract foreign investors, diversify funding sources, and strengthen their presence in global markets.