What is Global Depository Receipt? & How does it work?

What does Global Depository Receipt (GDR) mean?

A global depositary receipt (GDR) is a bank certificate for foreign firm shares that are issued in multiple countries. GDRs are fungible securities that combine shares from two or more markets, most commonly the US and Euromarkets.

GDRs are most typically utilized when an issuer wants to raise money in the local market as well as foreign and US markets, either through private placements or public stock offerings. A global depositary receipt (GDR) is comparable to an American depositary receipt (ADR), with the exception that an ADR only offers shares of foreign countries on US markets.

Global Depositary Receipt (GDR): An Overview

A GDR is a type of bank certificate that represents shares in a foreign company and is held by an international bank’s overseas branch. The shares are traded on a domestic level, although they are available for purchase worldwide through various bank branches. GDRs are used by private markets to raise financing in dollars or euros. GDRs are referred to as EDRs when private markets try to acquire euros instead of dollars.

Because GDRs are regarded as negotiable certificates, they are traded on a variety of exchanges. Cash markets are used by investors to enable the trading of long-term debt instruments as well as to generate capital. In the international market, GDR transactions have a high level of volatility.

GDRs are traded on a variety of exchanges because they are considered negotiable certificates. Money markets are used by investors to ease the trade of long-term debt instruments and to generate capital. GDR transactions have lower related costs in the international market than alternative procedures utilized by investors to trade foreign securities.

A GDR can be used by a firm situated in the United States that wants its stock to be listed on the London and Hong Kong Stock Exchanges. With the relevant foreign depository banks, the US-based corporation engages in a depositary receipt agreement. Following regulatory compliance in both countries, these banks issue shares on their respective stock exchanges.

How do depositary receipts work?

A depositary receipt is required when a corporation decides to list its stock worldwide. To do so, the corporation must first meet a number of conditions set forth by the exchange in question. ADR depositary receipts can also be issued as part of an initial public offering (IPO) or sold over the counter.

A real-life example makes the process of creating a depositary receipt easier to comprehend. Assume that a German automobile company wishes to use an ADR to issue its publicly traded shares. To do so, a US broker must purchase the company’s shares and send them to the depositary bank’s German custodian bank. The depositary bank will then issue the shares to the broker after the custodian bank confirms receipt of the monies.

Each ADR will represent a predetermined number of shares and can be freely traded on the New York Stock Exchange in the United States. The broker who invested has the same rights as an ordinary shareholder, as indicated on the ADR certificate.

Depositary Receipts’ Advantages

Depositary receipts are a way to boost global commerce, which can help boost not only quantities on local and international markets, but also information interchange, technology, regulatory procedures, and market transparency.

As a result, rather than encountering barriers to international investment, as is common in many emerging economies, the DR investor and company can both gain from foreign investment.

Let’s look at the advantages in more detail

For the benefit of the company

A corporation may choose to issue a DR in order to have more global exposure and raise finance. Issuing DRS provides the added benefit of raising the liquidity of the stock while also enhancing the company’s reputation in its home market (“the company is traded internationally”).

Depositary receipts promote a worldwide shareholder base and make it easier for expatriates living abroad to invest in their home nations. Furthermore, foreign investors are frequently prevented from accessing the local market in many nations, particularly those with emerging markets. A corporation can still encourage overseas investment by issuing a DR without having to worry about the barriers to entry that a foreign investor may face.

For the Investor

Investing in a DR transforms an investor’s portfolio into a global one almost instantly. Diversification assists investors while trading in their home market under the familiar settlement and clearance conditions.

More crucially, DR investors will be able to profit from these typically higher risk, higher return shares without the additional hazards of investing directly in foreign markets, which may lack transparency or be unstable due to changing regulatory procedures.

It’s vital to realize that an investor would still be exposed to foreign exchange risk as a result of rising economies and societies’ uncertainty. The investor, on the other hand, can benefit from the competitive rates that the US dollar and euro have against most foreign currencies.

Important Notice

GDRs (Global Depositary Receipts) can be issued in nations other than the United States.

GDRs vs ADRs: What’s the Difference?

A corporation can list its shares in multiple countries outside of its native nation via global depositary receipts. A Chinese corporation, for example, may establish a GDR program in which it issues its shares into the London and US markets through a depositary bank intermediary. Each issue must adhere to all applicable legislation in the home nation as well as in overseas markets.

On the other hand, an American depositary receipt (ADR) exclusively lists the company’s shares on U.S. stock exchanges. A US bank will purchase shares on a foreign market to offer ADRs. The stock will be held as inventory by the bank, and an ADR will be issued for domestic trading. On behalf of a foreign firm, a bank issues a sponsored ADR. A legal agreement is reached between the bank and the company. In most circumstances, the foreign company pays for the ADR’s creation and ownership, while the bank manages investor transactions.

Sponsored ADRs are classified according to how closely the foreign firm adheres to SEC standards and accounting procedures in the United States. An unsponsored ADR can also be issued by a bank. The foreign corporation, on the other hand, has no direct role, participation, or even approval in this certificate. There might theoretically be multiple unsponsored ADRs issued by various US banks for the same overseas company. These various options may also have differing dividends. With sponsored programs, there is only one ADR, which is issued by the foreign company’s bank.

Finally, What do people frequently ask?

What Characteristics Do GDRs Have?

GDRs may offer investors the benefits and rights of the underlying shares, such as voting rights and dividends, in addition to being listed on various worldwide exchanges. GDRs are traded on the stock exchange and can be bought and sold at any time of day using a regular brokerage account.

What Does a GDR Look Like?

Phillips 66, an American oil and gas business, is an example of a GDR (NYSE: PSX). It has depositary receipts listed on exchanges in Brazil (P1SX34), France (R66), Vienna (PSXC), and London (0KHZ.L), among others, in addition to its domestically traded shares.