GDR

By:- Rahul Sharma B.Com(Prof)

CONTENT DEPOSITORY RECEIPTS The Benefits & Risks of Depositary Receipts GLOBAL DEPOSITORY RECEIPTS Parties Involved GDR Market GDR Listing  Key Steps Involved in GDR mechanism GDR-Advantages and Disadvantages How does GDR work ?

DEPOSITORY RECEIPTS

A Depository Receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company.

The DR, which is a physical certificate, allows investors to hold shares in equity of other countries.

THE BENEFITS & RISKS OF DEPOSITARY RECEIPTS

To the company - Benefits• Cost of capital much lower • Broaden investor base• Presence in International Markets• No dilution of control as no voting rights

Risks•Prices may drop sharply after issue•Damage to issuers reputation •Impact on future issues •Flow back – investors will sell the shares back in the home stock market of the issuing firm

THE BENEFITS & RISKS OF DEPOSITARY RECEIPTS

To the investor

Benefits• Portfolio diversification• Easy & Cost effective way to buy shares of foreign

company• Tap foreign equity markets

Risks•Exchange risk•All risks borne by equity holder

GLOBAL DEPOSITORY RECEIPTS

"Global Depositary Receipts" means any instrument in the form of a depositary receipt or certificate (by whatever name it is called) created by the Overseas Depositary Bank outside India and issued to non- resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company

GDR-GLOBAL DEPOSITARY RECEIPTS

A Global Depository Receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets.

A bank certificate issued in more than one country for shares in a foreign company

Offered for sale globally through the various bank branches

Shares trade as domestic shares

“Issuing Company" means an Indian company permitted to issue Foreign Currency Convertible Bonds or ordinary shares of that company against Global Depositary Receipts

"Domestic Custodian Bank" means a banking company which acts as a custodian for the ordinary shares or foreign currency convertible bonds of an Indian Company which are issued by it against global depositary receipts or certificates

"Overseas Depositary Bank" means a bank authorized by the issuing company to issue global depositary receipts against issue of Foreign Currency Convertible Bonds or ordinary shares of the issuing company

PARTIES INVOLVED

“Clearing Systems” EUROCLEAR (Brussels), CEDEL (London) are the registrars in Europe and Depository Trust Company (DTC) is the registrar in USA who keep records of all particulars of GDR’s and GDR holders

“Lead Manager(s)” An investment bank with the primary responsibility for assessing the market and successfully marketing the issue. Liable to the company and the investors.

“Other Manager(s)” They agree to the take and market parts of the issue as negotiated with the lead manager

GDR MARKET GDRs can be created or cancelled

depending on demand and supply When shares are created, more corporate

stock is placed in the custodian bank in the depositary bank account

The depositary bank then issues the new GDRs Factors governing GDR prices are company track record, analysts recommendations, relative valuations, market conditions and also international status of the company

GDR LISTING  London Stock Exchange

Luxembourg Stock Exchange

Dubai International Financial Exchange (DIFX)

Singapore Stock Exchange

Hong Kong Stock Exchange

KEY STEPS INVOLVED IN GDR MECHANISM

Amount of issue is finalized. Company considers factors such as gearing, dilution effect on future earnings per share etc. Lead manager accesses the market conditions.

Agreement between lead manager and other manager to subscribe the issue at a price which will be determined on the issue date.

Depository and Custodian are appointed and issuer is ready to launch the issue.

Company issues a share certificate equal to the number of GDRs sold. Certificate is in the name of the depository, kept in the custody of the custodian. Before the receipts of the proceeds of the issue the certificate is kept in escrow.

Investors pay money to subscribers (lead managers & other managers)

Subscribers deposit fund with Depository after deducting their commissions and expenses

• Company registers the depository or its nominee as holders of shares in its register of shareholders.

• Depository delivers the European Master GDR to a common depository for CEDEL and EUROCLEAR and holds an American Master GDR registered in the name of DTC or its nominee

• CEDEL, EUROCLEAR and DTC allot GDRs to each of the ultimate investors based on the data provided by the managers through Depository

• The GDR holders pick up their GDR certificates. Anytime after the specified “cooling off” period after the close of the issue, they can convert their GDR into the underlying shares by surrendering the GDR to the Depository. The Custodian will issue the share certificates in exchange for the GDR.

• The GDRs are listed on the stock exchanges in Europe such as Luxembourg and London.

GDR-ADVANTAGES AND DIS-ADVANTAGES

GDRs allow investors to invest in foreign companies without worrying about foreign trading practices, laws

Easier trading, payments of dividends are in the GDR currency

GDRs are liquid because they are based on demand and supply which is regulated by creating or cancelling shares

GDR issuance provides the company with visibility, more larger and diverse shareholder base and the ability to raise more capital in international markets

However, they have foreign exchange risk i.e. currency of issuer is different from currency of GDR 

HOW DOES GDR WORK ? Let us take Infosys example ±trades on the

Indian stock at aroundRs.2000/- This is equivalent to US$ 40 ±assume

for simplicity Now a US bank purchases 10000 shares of

Infosys and issues them inUS in the ratio of 10:1

This means each ADR purchased is worth 10 Infosys shares.

Quick calculation means 1 ADR = US $400 Once ADR are priced and sold, its subsequent

price is determined bysupply and demand factors, like any ordinary shares.

IN SIMPLE TERMS -GDR ISSUE

COMPANY SHARE

DEPOSITARY BANK

INVESTOR 

INDIAN COMPANIES USING ADR/GDR

COMPANY ADR GDR

Bajaj No Yes

AutoDr. Reddys Yes Yes

HDFC Bank Yes Yes

HindalcoNoYes No Yes

ICICI BankYesYes Yes Yes

Infosys Technologies

Yes Yes

 ITC No Yes

L & T No Yes

MTNL Yes Yes

Tata Motors Yes No

SBI No Yes

WIPRO Yes Yes