What is a Global Depositary Receipt (GDR)?
A global depositary receipt (GDR) is a negotiable financial instrument issued by a depositary bank. It represents shares in a foreign company and trades on the local stock exchanges in investors’ countries. GDRs make it possible for companies to access capital markets beyond their domestic borders.
GDRs are commonly used by issuers to raise capital from international investors through private placements or public stock offerings.
GDRs are very similar to American depositary receipts except that ADRs only list shares of a foreign company in U.S. markets.
Key Takeaways
- A global depositary receipt is a tradable financial security.
- Represents shares in a foreign company and trades on two or more global stock exchanges.
- GDRs typically trade on American stock exchanges as well as Eurozone or Asian exchanges.
- GDRs and their dividends are priced in the local currency of the exchanges where they trade.
- GDRs provide an accessible means for U.S. and international investors to own foreign stocks.
Understanding Global Depositary Receipts (GDRs)
A global depositary receipt is a type of bank certificate representing shares of stock in an international company. These underlying shares remain on deposit with a depositary bank or custodial institution.
While shares of an international company trade as domestic shares in the country where the company is located, global investors can invest in those shares through GDRs.
Using GDRs, companies can raise capital from investors worldwide. For those investors, GDRs will be denominated in their home country currencies. Since GDRs are negotiable certificates, they can provide arbitrage opportunities to investors across multiple markets.
In the context of European investors trading locally in companies outside of Europe, GDRs can be referred to as European Depositary Receipts (EDRs).
GDR transactions tend to have lower costs than many other mechanisms used for trading in foreign securities.
Real-life Example of a GDR
Imagine a U.S.-based company aspiring to have its stock listed on the London and Hong Kong Stock Exchanges. This company could achieve this by utilizing GDRs. The company would establish a depositary receipt agreement with the respective foreign depositary banks, which would then package and issue the shares to their respective stock exchanges, complying with regulations for both countries.
A depositary, which is usually an independent entity like a bank, acts as a safekeeping facility and fiduciary, offering stock-related services for a depositary receipt program.
Unique Characteristics of GDRs
GDRs are exchange-traded securities representing ownership of shares in a foreign company, as opposed to being directly backed by any underlying collateral like company assets. Varied characteristics of different GDRs include:
- Conversion ratio: Number of company shares represented by each GDR can vary and may be adjusted to reflect changes in the underlying shares over time.
- Denomination: GDRs may be denominated in different currencies which impacts price and associated currency risk.
- Sponsorship: Issued by various depository banks with different reputations and financial strengths, impacting the risks and returns of a GDR.
- Fees: Vary in terms of issuance, trading, and holding fees, which can affect the overall cost and potential returns of a GDR investment.
Special Considerations for GDRs
Each GDR issued by a depositary bank represents a specific number of underlying shares in an international company. The exact configuration will depend on optimal appeal to local investors in terms of shares or fractions of shares and associated home currency value.
Depositary banks initially acquire the shares, bundle them, and issue the GDR on local exchanges while retaining the underlying shares in custody. The trading process for GDRs is regulated by the respective exchange.
Typically, GDRs are offered to institutional investors through private placements, which exemocalypse them from some traditional regulatory requirements, making GDRs an efficient, less costly method of accessing cross-border capital.
Navigating GDR Trade
International companies issue GDRs to attract foreign capital, trading on local exchanges while offering exposure to international markets. Brokers representing buyers facilitate the purchase and sale of GDRs. Custodian authorities maintain the GDRs’ underlying shares, providing protection and ease of trade.
The purchase of such assets involves multi-staged brokerage activities across domestic and foreign markets and institutions. GDR investors can opt to sell on exchanges or convert to regular stock for the company involved.
Arbitration and price parity between GDRs and the domestic company shares are achieved through comparative trading in different markets, leading to equilibrated prices over time.
Consider the Advantages and Disadvantages of GDRs
Advantages
- Extend companies’ reach to a more diverse investor base.
- Potentially increase share liquidity.
- Aid companies in conducting cost-efficient private offerings.
- Enhance status and legitimacy when listed on global exchanges.
- Offer investors international portfolio diversification without extensive complications.
Disadvantages
- Potential significant administrative fees and currency conversion expenses.
- Possible low liquidity making sales harder.
- Risks include currency changes, political events, and home country economic conditions.
- Additional complexities in taxation for foreign investors.
Comparing GDRs and ADRs
Global Depositary Receipts (GDRs)
GDRs enable a company’s shares to list in multiple countries outside its home country, following each market’s legal framework.
American Depositary Receipts (ADRs)
ADRs represent shares of international companies listed on U.S. exchanges and are issued/sponsored by domestic banks in legal arrangement with foreign companies. Unsponsored ADRs could be issued independently by U.S. banks without the involvement of the issuing foreign company.
Highlight: Example of Global Depositary Receipts
For instance, run scenarios like an American company’s stock trading through GDRs on markets like London and Hong Kong, offering diverse listings for international market access.
The Bottom Line
For U.S. investors, GDRs confer ownership rights in foreign companies while trading representative shares domestically. Despite associated risks, GDRs offer significant benefits, such as achieving a globally diversified portfolio with localized trading, clearing, and settlement mechanisms.
Related Terms: American Depositary Receipt, stock exchange, capital markets, foreign stocks, investment diversification.
References
- Citi. “Global Depositary Receipts (GDRs): A Primer”.
- Internal Revenue Service. “Foreign Currency and Currency Exchange Rates”.
- U.S. Securities and Exchange Commission. “Investor Bulletin: American Depositary Receipts”, Page 2.
- Phillips 66. “Stock Information”.
- Yahoo Finance. “Phillips 66 (P1SX34.SA)”.
- Yahoo Finance. “Phillips 66 (R66.DE)”.
- Yahoo Finance. “Phillips 66 (PSXC.VI)”.
- Yahoo Finance. “Phillips 66 (0KHZ.L)”.
