What is Global Depository Receipt (GDR)? Meaning, Features, Benefits & How it Works

As businesses expand, the need for additional funds keeps increasing. Many companies eventually look for funding beyond their domestic market. One way of doing this is through Global Depository Receipts (GDRs). These allow overseas investors to participate without buying shares directly from the company's home stock exchange.

This article explains what is global depository receipt, how it works, its features, benefits, risks and everything else you should know before investing.

What is A Global Depository Receipt (GDR)?

A Global Depository Receipt (GDR) allows investors in one country to invest in a company listed in another country. They do not buy the company's shares directly from its home stock exchange. Instead, they buy GDRs issued by a depository bank.

The following are some characteristics of GDRs.

• Each GDR represents one or more underlying shares.

• They are issued by an overseas depository bank.

• The underlying shares remain with a custodian bank.

• GDRs are traded on recognised international stock exchanges.

How Does A Global Depository Receipt Work?

Several parties work together when a company issues GDRs. Apart from the company, there is a custodian bank and a depository bank, each with a different role in the issue. The process generally looks like this:

1. A company decides to raise money from investors outside its home country.

2. The company's shares are deposited with a custodian bank in its home country.

3. An overseas depository bank issues Global Depository Receipts against those shares.

4. Investors buy the GDRs through the foreign stock exchange where they are listed.

The value of the GDR generally moves in line with the price of the underlying shares. Factors like exchange rate and GDR ratio also come into the picture.

Key Features of Global Depository Receipts

Although GDRs represent shares of a company, they are different from buying those shares directly on the domestic stock exchange. They are designed to make cross-border investing simpler for both companies and investors.

Features of GDRs include:

• The company decides the number of equity shares each GDR represents.

• Trading usually takes place on international stock exchanges and not the company's home exchange.

• Foreign currencies are usually used for trading GDRs. The US Dollar is one of the common choices.

• The shares stay with a custodian bank. Investors receive GDRs issued by a depository bank.

• The rights available to investors depend on the terms of the GDR issue.

Types of Depository Receipts

Depository receipts are issued in different forms depending on where they are listed and who the target investors are. The basic structure often remains similar. However, each type serves a different market.

American Depository Receipt (ADR)

As the term suggests, ADRs are specific to the United States of America. They represent shares of foreign companies. Instead of buying those shares directly from a foreign stock exchange, investors can buy ADRs through US stock exchanges. A classic example of this is Wipro, whose ADRs trade on the New York Stock Exchange, each representing its underlying shares.

Global Depository Receipt (GDR)

Through GDRs, companies raise money from investors across different international markets. Unlike an ADR, a GDR is not limited to the United States. GDRs are typically listed on stock exchanges in Europe and other international financial centres. Reliance Industries Limited's shares are traded on the London Stock Exchange in this form.

Indian Depository Receipt (IDR)

An Indian Depository Receipt (IDR) gives Indian investors an opportunity to invest in a foreign company. The receipts are issued in India. The company's underlying shares continue to remain listed in its home country. For example, Standard Chartered PLC, a London-based bank, issued its IDR in India until 2020 via the National Stock Exchange and the Bombay Stock Exchange.

Why Do Companies Issue Global Depository Receipts?

Global Depository Receipts give companies a way to access foreign capital. They also introduce businesses to a wider group of investors.

Below are some common reasons for companies to issue GDRs.

• Large expansion plans sometimes require access to more capital than the domestic market can comfortably provide.

• GDRs open the door to investors from different countries through a single issue.

• An overseas listing also helps put the company in front of a wider investment community.

• The investor base becomes more diverse instead of being concentrated in one market.

• For companies with global ambitions, GDRs can become part of their long-term fundraising strategy.

Benefits of Global Depository Receipts

Buying shares of companies listed in another country is not always straightforward. It involves foreign exchange, international taxes and other regulatory requirements. Global Depository Receipts make that process simpler by allowing investors to trade them through recognised international exchanges.

Key benefits of GDRs include the following.

• Buying shares through a GDR is often simpler than investing directly in a company's home market.

• Investing in foreign companies allows investors to hold a diversified portfolio.

• Recognised international exchanges make GDRs easier to buy and sell for eligible investors.

• GDRs are usually traded in globally accepted currencies. Hence, cross-border transactions become easier.

• The investment remains linked to the company's underlying shares. Investors can therefore benefit from its performance, subject to the terms of the issue.

Risks of Investing In Global Depository Receipts

Investing outside your home country can create opportunities for foreign exposure. Along with it comes additional risks that may not apply in case of domestic transactions. Investors should therefore weigh the following factors, not just the company's performance.

• Returns get significantly impacted by exchange rate fluctuations.

• Economic events in another country apart from the company's home country can also influence GDR prices.

• Finding enough buyers or sellers may not always be easy for every GDR.

• Different countries follow different regulations. Keeping track of all of them, especially when they change, may be difficult.

• GDRs are ultimately linked to a company's shares. Hence, the company's performance still matters.

Who Can Invest In Global Depository Receipts?

Global Depository Receipts are designed for investors who want to look beyond their domestic market. Access, however, depends on the regulations of the country where the GDR is listed.

The following categories of investors usually look for GDRs.

• Institutional investors looking for global diversification

• Foreign portfolio investors investing across different markets

• High-net-worth individuals with international investment exposure

• Investors seeking access to overseas companies through recognised stock exchanges

• Eligible investors who understand the additional risks associated with cross-border investments

Eligibility Criteria for Companies Issuing GDRs

Not every company can issue GDRs whenever it wants. Before approaching overseas investors, it has to complete several regulatory and listing formalities. The exact requirements depend on the country where the GDRs will be issued and the stock exchange chosen for the listing.

Here are a few things companies usually take care of to be eligible for GDR issuance.

• Compliance with the eligibility conditions prescribed by the relevant regulators.

• Regulatory approvals before the issue opens to investors.

• Disclosure and reporting requirements continue throughout the process.

• A depository bank and a custodian bank need to be appointed for the issue.

• The listing rules of the overseas stock exchange must also be met.

Global Depository Receipt Example

Tata Steel's GDR issue is a notable example of how these instruments work. In 2009, the company raised US$500 million through a GDR issue listed on the London Stock Exchange. The offering received a strong response from international investors and was one of the largest GDR issues by an Indian company in London at the time.

Here is how the GDR issuance looked:

• Tata Steel decided to raise money from investors outside India instead of depending only on the domestic market.

• It listed GDRs on the London Stock Exchange for international investors to subscribe.

• The company deposited a fixed number of its shares with a custodian bank in India.

• A depository bank then issued GDRs against those shares. Each GDR represented one Tata Steel share.

• The GDRs got a strong response from investors. As a result, Tata Steel increased the issue size from US$400 million to US$500 million.

• The capital raised was earmarked for expansion projects. This covered the company's Jamshedpur operations and mining projects outside India.

GDR Vs Shares: What is The Difference?

A GDR gives you an interest in a company's shares. However, you do not buy those shares directly. The biggest difference lies in how investors can buy them.

Taxation of Global Depository Receipts in India

The tax rules for GDRs are not always the same. They can vary depending on the type of income earned. Section 115AC of the Income Tax Act, 1961 covers taxation on certain GDRs issued by Indian companies.

• Eligible dividend income attracts a tax of 10%.

• Holding an eligible GDR for more than 12 months may qualify the gains as long-term capital gains, taxable at 12.5% (for eligible transfers on or after 23 July 2024).

• A sale within 12 months is treated as a short-term capital gain. It is taxed according to regular income tax rates.

• Certain transactions may include Tax Deducted at Source (TDS) under Section 196C.

Advantages and Disadvantages of Global Depository Receipts

No investment option is completely risk-free, and GDRs are no exception. They simplify international investing, but a few trade-offs are still worth noting.

Advantages

• Companies from different parts of the world become easier to access.

• The investment is made through an internationally traded security instead of the domestic share market.

• Adding global companies can reduce dependence on a single market.

• The same portfolio can include businesses across different economies.

Disadvantages

• Returns are impacted by foreign exchange rate fluctuations.

• Different markets may follow different legal and regulatory frameworks.

• Some GDRs may not have sufficient liquidity.

• Understanding the tax treatment may require a little more effort than domestic investments.

How to Invest in Global Depository Receipts?

Buying a GDR is not very different from investing in other securities listed on overseas stock exchanges. The only thing to check first is whether your broker gives you access to the exchange where the GDR is available.

The process generally involves the following steps.

• Choose a broker that offers access to international stock exchanges.

• Complete the account opening formalities, including the required KYC.

• Look up the GDR you wish to invest in on the trading platform.

• Place your buy order after reviewing the price and other details.

• Monitor your investment and sell the GDR whenever it matches your investment objective.

Factors to Consider Before Investing in Global Depository Receipts

Look beyond the market price before investing. Spend some time understanding the company as well. Check where the GDR is listed and how actively it is traded. It is also worth looking at the currency involved and the tax rules that may apply.

Conclusion

GDRs have made it easier for companies to raise money beyond their home country. For investors, they offer another way to explore businesses listed overseas. Like any investment, taking a little time to understand what is GDR and how it works can help you invest with greater confidence.