Global Depository Receipts, commonly known as GDRs, have become an essential tool for raising capital for companies globally. In this article, we will explore what GDRs are, how they work, their advantages and disadvantages, and the difference between GDRs and ADRs.
Introduction
In today’s globalized world, companies need to have access to capital markets worldwide to fund their growth plans. One such tool that has emerged over the years is Global Depository Receipts (GDRs). GDRs have become a popular way for companies to raise capital from international markets.
What is a GDR?
A Global Depository Receipt (GDR) is a negotiable certificate that represents ownership of a company’s shares. GDRs are typically issued by non-US companies, allowing them to raise capital from international investors. GDRs are issued by depository banks that hold the underlying shares of the issuing company.
How do GDRs work?
When a company decides to issue GDRs, it appoints a depository bank, typically a large global bank, to issue and manage the GDR program. The depository bank then purchases the underlying shares of the company and issues GDRs that represent ownership of those shares. These GDRs are then listed on international stock exchanges, such as the London Stock Exchange or Luxembourg Stock Exchange.
Types of GDRs
There are two types of GDRs:
Sponsored GDRs
Sponsored GDRs are issued with the support of the company whose shares are being represented. These GDRs are typically listed on international stock exchanges and provide investors with voting rights and dividends.
Unsponsored GDRs
Unsponsored GDRs are issued without the support of the company whose shares are being represented. These GDRs are typically not listed on international stock exchanges and do not provide investors with voting rights or dividends.
Advantages of GDRs
There are several advantages to issuing GDRs for companies:
Access to foreign capital
GDRs provide companies with access to a global pool of capital. This allows companies to raise funds from international investors and diversify their funding sources.
Liquidity
GDRs are listed on international stock exchanges, providing liquidity to investors who may not have access to the underlying shares of the company.
Diversification of investor base
Issuing GDRs allows companies to diversify their investor base geographically. This can provide a more stable funding source in times of economic or political uncertainty.
Disadvantages of GDRs
There are also several disadvantages to issuing GDRs for companies:
Regulatory compliance
Issuing GDRs requires compliance with the regulations of the country in which they are listed, as well as the regulations of the country in which the issuing company is based. This can be a complex and time-consuming process, which can increase the cost of issuing GDRs.
Currency risk
Since GDRs are denominated in foreign currency, companies that issue GDRs are exposed to currency risk. This risk arises when the underlying shares are denominated in a different currency than the GDRs. Changes in exchange rates can have a significant impact on the value of the GDRs.
GDRs vs. ADRs
American Depository Receipts (ADRs) are similar to GDRs, but they are issued by US banks and represent ownership of shares in non-US companies. ADRs are listed on US stock exchanges and are subject to the regulations of the Securities and Exchange Commission (SEC).
The main difference between GDRs and ADRs is the regulatory regime that governs their issuance and listing. While GDRs are subject to the regulations of the country in which they are listed, ADRs are subject to the regulations of the SEC.
Conclusion
GDRs have become an important tool for companies looking to raise capital from international markets. They provide companies with access to a global pool of capital and allow them to diversify their investor base.
However, issuing GDRs also comes with regulatory compliance and currency risk considerations. Understanding these factors can help companies make informed decisions about whether to issue GDRs.
FAQs
- What is the difference between a sponsored and unsponsored GDR?
- A sponsored GDR is issued with the support of the company whose shares are being represented, while an unsponsored GDR is issued without the support of the company.
- Can GDRs be listed on US stock exchanges?
- Yes, GDRs can be listed on US stock exchanges, but they will be subject to the regulations of the Securities and Exchange Commission.
- Are GDRs denominated in foreign currency?
- Yes, GDRs are denominated in foreign currency, which exposes companies to currency risk.
- What is the difference between a GDR and an ADR?
- A GDR is issued by a non-US bank and represents ownership of shares in a non-US company, while an ADR is issued by a US bank and represents ownership of shares in a non-US company.
- What are the advantages of issuing GDRs?
- The advantages of issuing GDRs include access to foreign capital, liquidity, and diversification of the investor base.