What is a GDR (global depository receipt)
A global depository receipt (GDR) is a financial term used to refer to a certificate that is issued and sold on a stock exchange by a depositary bank to represent shares in a foreign company. GDRs enable investors to trade shares in companies that are not eligible for direct listing on their domestic exchange. Essentially, through a certificate issued by a depositary bank, it is a way for investors to buy and sell shares in foreign companies.
Where have you heard of GDRs?
Global Depository Receipts (GDRs) are often discussed as a viable investment option for investors looking to diversify their portfolios with exposure to international markets, particularly emerging markets such as China and India. GDRs are shares issued by depositary banks on a stock exchange to represent shares in a foreign company, which enables investors to buy and sell shares in companies that are not eligible for listing directly on their local exchange.
What should you know about Global Depositary Receipts?
How do GDRs work?To issue GDRs, a company uses a foreign bank as an intermediary to buy shares in its home market, create a GDR representing the shares, and then sell the GDRs on a foreign stock exchange to raise funds from foreign markets. GDRs are usually traded in US dollars or euros and represent a specific number of common shares in a company, with the voting rights held by the depository bank rather than the GDR holder.
Unlike ADRs, which enable foreign company shares to be traded on US stock exchanges, GDRs can be traded in multiple countries and are listed on the IOB. The IOB was established in 2001 as a central electronic order book to provide investors with direct access to GDRs from over 30 countries. The LSE operates the IOB and trades are settled by the Euroclear clearing house, acting as a central securities depository.
Emerging market companies may choose to list GDRs on foreign stock exchanges to raise capital for expansion or debt repayment. By listing on larger international markets, they can attract more investors and higher share prices.
Investors who wish to benefit from the growth potential of companies in the developing world as compared to the more established economies may wish to invest in GDRs. GDRs provide investors with a convenient way to invest in foreign companies, as they can be traded through their regular brokerage accounts instead of having to exchange currencies and open foreign accounts.
For example, Samsung Electronics, a multinational electronics company from South Korea, has its GDRs listed on several European exchanges such as the LSE, the Frankfurt Stock Exchange and the Luxembourg Stock Exchange (LuxSE). GAIL India, the largest gas company in India, trades its GDRs on the LSE. Gazprom, one of the world’s largest energy companies based in Russia, also trades its GDRs on foreign exchanges such as the Singapore Stock Exchange.