Global Depository Receipts Meaning, Features
Global Depository Receipts or GDR means negotiable instruments issued by a domestic company in the abroad to raise funds in the home country. A Global Depository Receipt is generally denominated in US Dollar terms. So in simple terms, it can be said that under the Global Depository Receipts arrangement, a domestic company with the help of an Overseas Depository Bank or ODB issues certificate in the form of shares of the foreign company or Foreign Currency Convertible Bonds. The Global Depository Receipts are primarily traded in the Capital Market in order to raise capital or long term funds.
What is A GDR / Global Depository Receipts and its features?
The GDR or Global Depository Receipt is a negotiable instrument or certificate in form of depository receipt issued by an Overseas Depository Bank outside India against shares or Foreign Currency Convertible Bonds of an Indian company. Most importantly the GDR is represented in US dollar currency. GDRs help the domestic company to get exposure to the global equity markets by raising foreign currency capital or equity.
The ODB is authorized by the domestic company to issue the securities only after the instructions of the custodian domestic bank of the domestic company. Generally, the shares and foreign currency convertible bonds are handed over to the domestic custodian bank of the domestic company. This custodian bank then issues instructions to the ODB for issuance of GDR securities to non-residents against the shares or bonds held by it.
What are the Features of Global Depository Receipts?
Global Depository Receipts may be enlisted in any Overseas Stock Exchanges and are transacted Over The Counter (OTC) or Otc market or even among the Qualified Institutional Buyers(QIB) or Institutional investors. They are freely tradable like other dollar expressed securities and transferrable certificate or Debt instruments and can be bought by non-resident investors only. The features of GDR are given below.
- Nature- A GDR is a negotiable instrument in exchange of shares or Foreign Currency Convertible Bonds for raising capital in foreign currency;
- Denomination- GDRs are expressed in US Dollar currency;
- Tradability- GDR is a freely tradable in Capital markets and a transferrable certificate in the form of depository receipts;
- Listing- Global Depository Receipts are listed on Overseas Stock exchanges like American stock exchanges and is traded over the counter( Financial markets ) and among the Qualified Institutional Buyers;
- Underlying Asset- A GDR is issued against the underlying asset or underlying shares which is Common stock or Equities or bonds of the domestic company as held by the Domestic custodian bank. Further, this share can be one or more than one share as the underlying asset of the GDR;
- Redemption- A non-resident GDR investor can exchange his GDR against the equivalent shares or bonds only after 45 days of its allotment;
- Buyer/Investor- Generally, the non-resident investors are permitted to buy GDR;
- Raising of capital- A GDR is primarily issued by the domestic company for raising capital in foreign currency ;
- Return- The holders of the GDR receive dividends from the company in local currency after converting it into American dollars( Foreign currency ) at the going rate of exchange.
- Foreign Direct Investment(F.D.I)- The shares and Foreign Currency Convertible Bonds issued against the GDR is treated as the Foreign Direct Investment in the issuing company. However, this foreign direct investment in the form of GDR is permissible up to 51% of the issued and subscribed capital of the issuing company;
- Prior permission- The issuer of GDR has to obtain the prior permission of the Government of the respective domestic country.
What is the Global Depository Receipts Mechanism?
- The domestic company makes an agreement with ODB for issuance of GDR.
- The overseas depository bank enters into a custodian agreement with the domestic custodian of such domestic company.
- The domestic custodian holds the equity shares of the company.
- On the instruction of domestic custodian, the ODB issues shares to the foreign investors.
How GDR is transferred or sold?
A non-residents GDR investor may transfer his depository receipts or may request the Overseas Depository bank, to redeem his holdings. After receiving the redemption requests from the non-resident investors, the ODB requests the domestic Custodian bank to release the underlying shares against the non-resident investors. The ODB gives a copy of this to the domestic company for their needful action and recording.
How GDR works?
The domestic company(issuer) makes an agreement with ODB for issuance of GDR. The overseas Depository bank enters into a custodian agreement with the domestic custodian of such domestic company. The domestic custodian holds the equity shares of the company. On the instruction of domestic custodian, the ODB issues shares to the foreign investors.
What is the return of the GDR?
The Dividends are paid by the domestic company in the local currency against the underlying ordinary shares held by the non-resident investors. On the other hand, the Foreign Currency Convertible Bonds carry a fixed rate of interest. The principal and interest against this FCCB are payable in the foreign currency till the conversion of bonds denominated in the domestic currency. Also, this bond can be converted into ordinary shares at the prefixed price on the basis of the warrants attached to the instrument.
What are the eligibility criteria for the issuer of the GDR?
For obtaining prior approval from the Government for issuance of the Global Depositary Receipts, the issuing domestic company must have previous consistent financial track records for a minimum period of 3 years. However, for some infrastructural projects, some relaxation is given to these criteria.
After the issue structure is finalized, the GDR issuing company may obtain the final approval for this issue from the Govt. It should also be kept in mind that the funds so raised by the issuance of GDR can no way be invested in the stock market. Issuer
What are the advantages of GDR?
- GDR is a freely tradable negotiable instrument.
- GDR has the option of a free transfer to others.
- An easy way of getting funds or Equity financing from foreign capital market.
- A medium for keeping your footprint to the global market.
- GDR is represented in Us dollars.
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