Definition
Global Depository Receipts (GDRs) are bank certificates issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. GDRs represent ownership of an underlying number of shares of a foreign company and are commonly used to invest in companies from developing or emerging markets.
Key Takeaways
- Global Depository Receipts (GDRs) are a financial instrument used by private markets to raise capital denominated in either U.S. dollars or Euros. They represent a certain number of shares in a company and are issued on the international market, primarily used by companies within emerging markets.
- GDRs facilitate the process of trading shares, especially those from emerging markets. Investors around the world can buy these receipts, which are backed by actual shares in a foreign company’s stock held in the bank issuing the receipt. This allows investors to own foreign stocks indirectly and helps diversify their portfolios.
- One of the main advantages of GDRs is that they allow companies to attract additional foreign investments, which can be particularly beneficial for companies in emerging markets. However, it also exposes the company to exchange rate risk as their income from the GDR will be in a different currency to the one that they typically operate in.
Importance
Global Depository Receipts (GDRs) are an essential financial instrument in the global equity market as they allow investors to invest in foreign companies without dealing with the complexities of foreign trade regulations.
GDRs are certificates issued by international banks representing a specific number of shares in a foreign company traded globally, typically in European or American markets.
This facilitates the foreign company’s exposure to overseas investors, leading potentially to increased capital-raising opportunities.
It also offers an attractive investment opportunity for investors by providing portfolio diversification and reducing home bias in investments.
Thus, due to their potential for fostering international trade and investment, GDRs are an essential element in global finance.
Explanation
Global Depository Receipts (GDRs) are an innovative financial instrument that internationalize and facilitate investment in companies across borders. The primary purpose of GDRs is to provide investors with an efficient mechanism to invest and hold shares in a foreign corporation.
Essentially, these are certificates issued by a bank that represent a specific number of shares in a company. These certificates are typically denominated in an easily convertible currency, such as the U.S Dollar, which makes it easier for investors around the world to invest in subsidiaries and affiliates of international corporations.
An important advantage of investing through GDRs, rather than directly buying shares in the foreign market, is the ease of transaction and ownership transfer. The investor does not have to worry about the differences in foreign regulations, tax laws, and transaction costs.
Furthermore, the issuing of GDRs by companies also serves to attract potential investors from other countries, thus increasing their shareholder base and potentially their stock price. In summary, GDRs are primarily used to enable and simplify the involvement of international investors in foreign companies, thereby promoting global investment and companies’ access to foreign capital.
Examples of Global Depository Receipts
Gazprom GDR: Gazprom, the Russian energy conglomerate, issued Global Depository Receipts (GDRs) to raise foreign investment without listing domestically. These GDRs are negotiable certificates held in the bank of depository and represent a specific number of shares in the company. Investors outside of Russia could now invest in Gazprom without dealing with buying shares on the Russian stock exchange.
Tata Motors GDR: In 2004, India’s largest automobile company, Tata Motors, issued Global Depository Receipts in addition to its listing in the Indian Stock Exchange. This allowed Tata Motors to reach a wider pool of international investors and raise capital for its expansion plans.
Infosys GDR: Infosys, one of India’s leading IT companies, listed its shares in the form of GDRs on the European stock exchange. The access to a wider investor base helped Infosys not only in terms of capital growth but also increased its brand visibility around the globe.
FAQs on Global Depository Receipts
What is a Global Depository Receipt (GDR)?
A Global Depository Receipt (GDR) is a bank certificate issued in multiple countries for shares in a foreign company. The shares are held by a foreign branch of an international bank, and the shares trade as domestic shares, but are offered for sale globally.
How do Global Depository Receipts work?
Global Depository Receipts are issued by the international depositary bank and are listed on international exchanges. GDRs grant investors the right to own foreign equity even though the shares are not directly purchased on a foreign exchange. Essentially, the depository bank purchases shares on a foreign exchange and then issues receipts on those shares on the local exchange.
What are the benefits of investing in GDR?
Investing in GDRs provides investors a way to invest in foreign companies without the need for cross-border transactions and converting currency. GDRs also offer a mechanism for diversification, as they allow investors to add foreign investments to their portfolios. Additionally, GDRs may provide more liquidity than the underlying shares because they are traded on more exchanges.
What are the risks associated with GDR?
Like any investment, GDRs come with risks. These involve exchange rate risk (the risk that the currency in the country where the GDR is issued will decline against the holder’s local currency), as well as the political and economic stability of the country where the GDR issuer is located. Investors must always thoroughly research any potential investments, including GDRs.
Where can I trade Global Depository Receipts?
Global Depository Receipts are usually listed on international exchanges, such as the London Stock Exchange or the Luxembourg Stock Exchange. However, they can also be traded over-the-counter.
Related Entrepreneurship Terms
- International Financial Markets
- Euroclear System
- Foreign Equity Instruments
- Sponsored Depository Receipts
- Emerging Market Investments
Sources for More Information
- Investopedia: This is a comprehensive source for investing and finance related content. You can search “Global Depository Receipts” directly in the search bar to find related articles.
- New York Stock Exchange (NYSE): The NYSE site provides resources and insights related to all aspects of stock trading, including global depository receipts.
- Reuters: Reuters is a reliable source for news and reports in all fields, including finance. You can search “Global Depository Receipts” on the site to find related news.
- Bloomberg: This is another comprehensive source for finance and investing news worldwide. Use the search function for specific articles on Global Depository Receipts.
