A Global Depositary Receipt (GDR) is a bank certificate that symbolises shares in a foreign company, with the shares being held by a foreign branch of an international bank. GDRs are traded on a variety of exchanges because they are considered negotiable certificates. In the international market, GDR transactions have lower associated costs than alternative mechanisms used by investors to trade foreign securities.

GDR is an important topic in the UPSC IAS Exam Indian Economy syllabus.

What is a Depositary receipt (DR)?

• A depository receipt is a negotiable (transferable) financial instrument or certificate issued by a bank to reflect security of a foreign company's publicly traded securities that is exchanged on a local stock exchange, usually in the form of equity, shares, or other securities.
• The depository receipt allows investors from any country to invest in, hold shares in, and trade in the securities of a company based in another country, allowing shareholders to share in the company's capital gains and dividends.
• American depositary receipts, European depository receipts, Global depository receipts, Indian depository receipts are among the types of depository receipts.
• When a foreign firm wants to list its publicly traded shares or securities on an international stock exchange, it must first issue a depository receipt.
• Before listing its stocks for sale, a corporation must adhere to the stock exchange's special rules.
• A company's stock must be transferred to a brokerage house in its home nation.
• After receiving the shares, the brokerage house sells them by issuing depository receipts through a custodian connected to the foreign exchange.
• The depository receipts can be exchanged over the counter in the open market.

Global Depository Receipt (GDR)

• The term "global depository receipt" refers to depository receipts in which a depository bank issues a certificate and purchases shares of overseas businesses, then generates security on a local stock exchange backed by those shares.
• The custodian bank, which is located in the nation where the depository receipt was issued, is responsible for keeping the GDR shares safe.
• The depository bank normally chooses the custodian bank, which is in charge of collecting dividends and forwarding any issue notices or information to the depository bank, which then transmits them to the Global depository receipt holder.
• GDRs reflect the ownership of a predetermined number of shares in a foreign firm and are often used by investors from established countries to invest in companies from emerging and developing markets.
• Global depository receipts give any company access to investors in the capital markets outside of its home country.
• GDRs can be issued in several markets and can be denominated in any freely convertible currency.
• For example, an Indian firm that wants its stock to be listed on the London and Hong Kong Stock Exchanges can use a GDR to do so. The India-based company would engage with foreign depository banks in a depositary receipt agreement. These banks, in turn, issue shares on their respective stock exchanges based on regulatory compliance in both nations.

Global Depository Receipts and India

• The approach for issuing global depository receipts by any Indian company entails issuing rupee-denominated shares to a depository bank in another country. The depository bank then offers GDRs in foreign currency to international investors in exchange for these equity shares.
• The equity shares are physically held by the domestic custodian bank. In the company's books, the depository bank is listed as the owner of the company's equity shares. Any equity shareholder's voting rights are transferred to the depository bank.
• Only listed businesses can issue global depository receipts in overseas marketplaces.
• GDRs allow investors to gain access to any international company's capital markets without having to deal with the currency, language, or tax restrictions.
• Unless the GDRs are converted into shares, investors who invest in any Indian firm through GDRs remain tax-free in India.

Advantages of Global Depository Receipts (GDRs)

• Depository receipts increase the number of international shareholders and make it easier for overseas investors to access the local market.
• An investor's portfolio becomes a worldwide portfolio by investing in depository receipts. In overseas markets, investors can benefit from greater risk, higher return securities.
• The key benefit for GDR issuers is that their shares can reach a larger and more diverse audience of potential investors and that having their shares listed on major global exchanges can help to elevate the status or legitimacy of a previously unknown foreign company.
• It gives investors a simple option to diversify their portfolio internationally without having to open foreign brokerage accounts or deal with exchange rates.
• Depositary receipts are simply more easy and more cost-effective than buying stocks on international exchanges.

Disadvantages of Global Depository Receipts (GDRs)

• Taxation can be a little tricky. Typically, the bank withholds the appropriate amount to meet expenses and international taxes automatically. To avoid double taxation on any capital gains achieved, investors would need to seek a credit from or a refund from the foreign government's taxing authorities.
• They may have poor liquidity, which means there aren't many buyers and sellers, causing delays in entering and exiting positions.
• They may also come with considerable administrative fees in some circumstances.
• Investors are exposed to economic risks, as the foreign company's home nation may undergo a recession, bank collapses, or political turmoil.

Conclusion

Global depository receipts boost global trade, which can boost not only the amount of stocks traded on domestic and international exchanges, but also the exchange of information, technology, and market transparency.