What Are Global Depositary Receipts (GDRs)? Characteristics, Advantages, and Differences from ADRs
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Summary:
Global Depositary Receipts (GDRs) are financial instruments issued by depositary banks, representing shares in foreign companies. They trade on multiple global stock exchanges, providing companies access to international capital and allowing investors to diversify their portfolios. This comprehensive guide explores GDR characteristics, advantages, disadvantages, and their differences from American Depositary Receipts (ADRs). If you’re interested in global investing, understanding GDRs is essential for building a diversified portfolio.
What is a global depositary receipt (GDR)?
A global depositary receipt (GDR) is a versatile financial instrument that represents shares in a foreign company. It is issued by a depositary bank and allows these shares to trade on various stock exchanges worldwide. The primary purpose of GDRs is to enable companies to access capital from international investors, broadening their reach beyond their home country’s borders.
Understanding global depositary receipts (GDRs)
Global depositary receipts are certificates issued by banks, which represent shares of international companies. These certificates allow investors worldwide to invest in foreign companies, with the GDRs denominated in their home country’s currencies. GDRs offer flexibility and can be traded on multiple markets, potentially providing arbitrage opportunities for investors.
GDRs are often referred to as European depositary receipts (EDRs) when European investors seek to trade the shares of non-European companies.
Example of a GDR
Suppose a U.S.-based company aims to list its stock on the London and Hong Kong Stock Exchanges. In this scenario, a GDR program comes into play. The U.S. company enters into a depositary receipt agreement with foreign depositary banks. These banks package and issue shares on their respective stock exchanges, complying with the regulations of both countries.
A depositary bank acts as an independent entity, often a bank, responsible for safekeeping and acting as a fiduciary for the GDR program.
GDR characteristics
GDRs are exchange-traded securities that represent ownership of shares in foreign companies. They may possess specific characteristics that vary:
- Conversion ratio: The number of underlying company shares represented by each GDR, which may be adjusted over time.
- Denomination: GDRs can be denominated in various currencies, impacting their pricing and investment risks.
- Sponsorship: Different GDRs may be issued by different banks, each with varying reputations and characteristics.
- Fees: Costs associated with issuing, trading, or holding GDRs can vary, affecting overall investment costs.
Special considerations
The specific composition of a GDR, such as the number of shares or fractions thereof and the currency denomination, is tailored to appeal to local investors. The depositary bank acquires the international company’s shares, bundles them into GDRs, and issues these GDRs on a local stock exchange. The underlying shares remain with the depositary bank or custodian bank in the foreign country.
GDRs are subject to regulations of the exchanges where they trade, including pricing, dividends, and currency denomination.
Typically, GDRs are offered to institutional investors via a private placement due to exemptions from registration under the Securities Act of 1933. This makes GDRs an efficient and cost-effective method for companies worldwide to raise capital.
Trading GDRs
International companies issue GDRs to attract capital from foreign investors, enabling them to trade on the investors’ local exchanges while retaining protection through custodial banks. Brokers facilitate GDR transactions, buying and selling them in multi-staged processes. Arbitrage trading activities may cause GDRs to reach parity with the underlying shares.
GDRs vs. ADRs
Global Depositary Receipts (GDRs) allow a company to list its shares in more than one country outside of its home country. An example is a Chinese company creating a GDR program, issuing its shares through a depositary bank into the London and United States markets. Each issuance must comply with all relevant laws in both the home country and foreign markets individually.
American Depositary Receipts (ADRs), on the other hand, represent shares of an international company and are listed solely on U.S. stock exchanges. To offer ADRs, a U.S. bank purchases shares from a foreign exchange, holds the underlying shares, and issues an ADR for domestic trading.
Sponsored ADRs
Sponsored ADRs are issued by a bank on behalf of a foreign company. The bank and the business establish a legal arrangement, with the foreign company covering the costs of ADR issuance and retaining control while the bank manages investor transactions.
Unsponsored ADRs
Unsponsored ADRs are issued by banks without direct involvement from the foreign company. Multiple unsponsored ADRs for the same foreign company may exist, issued by different U.S. banks. These ADRs could offer varying dividends, unlike sponsored ADRs, which have a single issuing bank.
What is the meaning of global depositary receipt?
A global depositary receipt is a negotiable certificate issued by a bank. The certificate represents shares in a foreign company traded on a local stock exchange. GDRs give companies access to greater capital and investors the opportunity to invest in the equity of foreign companies.
What are some features of GDRs?
GDRs can be listed on multiple global stock exchanges, They also provide investors with the benefits and rights of the underlying shares, which could include voting rights and dividends. GDRs trade like shares and can be bought and sold throughout the day via a standard brokerage account.
What is the difference between an ADR and a GDR?
An American depositary receipt represents shares in a foreign company and is listed only on American exchanges. A GDR represents shares in a foreign company and is listed on various foreign stock exchanges.
What is an example of a GDR?
One example of a GDR is the American oil and gas company, Phillips 66 (NYSE: PSX). In addition to trading domestically, it has depositary receipts listed on exchanges in Brazil (P1SX34), France (R66), Vienna (PSXC), and London (0KHZ.L), among others.
The bottom line
For U.S. investors, global depositary receipts offer a way to own equity in foreign companies while trading its representative shares on a local stock exchange. Certainly, GDRs have their risks, including home country economic and political risk, currency risk, and liquidity risk.
Frequently asked questions
Are GDRs the same as ADRs?
No, GDRs (Global Depositary Receipts) and ADRs (American Depositary Receipts) are not the same. GDRs allow foreign companies to list their shares in multiple countries, while ADRs represent foreign company shares and are exclusively listed on U.S. stock exchanges.
How are GDRs priced?
GDRs are typically priced and traded in the local currency of the exchange where they are listed. This means that the price of GDRs can fluctuate based on exchange rates and the performance of the foreign company’s shares in its home country.
Can anyone invest in GDRs?
Yes, GDRs are accessible to international investors and can be bought and sold through standard brokerage accounts. However, it’s essential to be aware of the associated risks, including currency and political risks.
Are GDRs a suitable investment for diversification?
Yes, GDRs can be a valuable tool for diversifying an investment portfolio. They offer exposure to foreign companies and can potentially increase the diversification of an investor’s assets.
What are the taxation considerations for GDR investors?
GDR investors may face complex taxation issues, including currency conversion expenses and foreign taxes. Depending on the investor’s home country and the foreign company’s location, there could be tax implications that investors need to address.
Key takeaways
- GDRs, or Global Depositary Receipts, are tradable financial instruments representing shares in foreign companies.
- They provide companies with access to international capital and allow investors to diversify their portfolios.
- GDRs trade on various global stock exchanges, with prices and dividends in the local currency.
- Investors should consider pros and cons, including potential liquidity and taxation issues, before investing in GDRs.
- GDRs differ from ADRs in terms of listing locations and accessibility to international markets.
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