Question

What is Global Depository Receipt?

Answer 1

1. Global Depository Receipt (GDR) is an instrument in which a company located in a domestic country issues one or more of its shares or convertible bonds outside the domestic country.
2. The issue of Global Depository Receipt is one of the most popular ways to tap the global equity markets. A company can raise foreign currency funds by issuing equity shares in a foreign country.
3. Indian company issues shares to an intermediary called Depository'. This depository bank issues GDR to investors against these shares.
4. The GDR represents a fixed number of shares. This GDR is then sold to people in a foreign country. The GDR is traded like regular shares. The prices fluctuate depending upon demand and supply and it is listed on a stock exchange.

5. The exchange on which GDR is traded are as follows:
   • London Stock Exchange
   • Luxembourg Stock Exchange
   • NASDAQ
   • Singapore Stock Exchange
   • Hong Kong Stock Exchange

Following are the advantages of GDRs:

1. GDR provides access to foreign capital markets.
2. A company can get itself registered on an overseas stock exchange or over the counter and its shares can be traded in more than one currency.
3. GDR increases the shareholders base of the company,
4. With GDR, the non-residents can invest in shares of the foreign company. It can be freely transferred.

Following are the disadvantages of GDRs:

1. Violating any regulation can lead to serious consequences against the company.
2. Dividends are paid in domestic countries currency which is subject to volatility in the forex market.
3. It is mostly beneficial to High Net Worth Individual (HNI) investors due to their capacity to invest a high amount in GDR.
4. GDR is one of the expensive sources of finance.