Global Depositary Receipts (GDRs) are a type of negotiable financial instrument that represent shares in a foreign company. They allow investors to hold equity shares in foreign companies and trade them on local stock exchanges.
Characteristics of GDRs
Global Depositary Receipts exhibit several notable characteristics:
- Negotiability: GDRs are transferable securities that can be bought or sold.
- Representation of Shares: Each GDR represents one or more shares of a foreign company.
- Listed on Exchanges: They can be listed on international exchanges, such as the London Stock Exchange or the Luxembourg Stock Exchange.
- Dividends: Holders of GDRs are entitled to dividends and other entitlements related to the underlying shares.
- Denominated in Foreign Currency: GDRs are typically denominated in US dollars, making them accessible to international investors.
Types of GDRs
- Sponsored GDRs: Issued with the direct involvement of the foreign company whose shares are being represented.
- Unsponsored GDRs: Issued without the involvement of the foreign company, often by a depositary bank.
Historical Context
The concept of depositary receipts dates back to the 1920s but became more prevalent in the late 20th century as global trade and investments grew. GDRs provide a mechanism for companies to access international capital markets and for investors to diversify their portfolios globally.
Examples
Case Study 1: Infosys Limited
Infosys, an Indian multinational corporation, issued GDRs to tap into the European and American investor base, enabling easier access to European and American capital.
Case Study 2: Samsung Electronics
Samsung Electronics, a South Korean company, uses GDRs listed on the London Stock Exchange to attract investment from European investors who might not have direct access to South Korean markets.
Applicability
GDRs are utilized by multiple parties:
- For Companies: As a method to raise capital internationally.
- For Investors: As a vehicle to invest in foreign companies without the complexities of direct foreign investments.
- For Markets: To improve liquidity and integration with global markets.
Comparisons with ADRs
American Depositary Receipts (ADRs) are similar to GDRs but are listed specifically on American exchanges such as the NYSE or NASDAQ.
Related Terms
- Depositary Bank: The entity that issues and manages the GDRs.
- Custodian: A financial institution holding the underlying shares on behalf of the depositary bank.
- Dividend: A portion of a company’s earnings distributed to shareholders.
FAQs
Q1: How are GDRs taxed?
Generally, dividends received from GDRs are subject to both the domestic tax laws of the issuer’s country and the investor’s country. Capital gains tax is also applicable based on local tax regulations.
Q2: What is the difference between a GDR and an ADR?
The primary difference lies in the market they are traded on: ADRs are traded on American exchanges, while GDRs are traded on global exchanges, often outside the US.
References
- Investopedia. “Global Depositary Receipts (GDRs).” Investopedia.
- Financial Times Lexicon. “GDR (Global Depositary Receipt).” Financial Times.
- Securities and Exchange Commission (SEC). “Guide to GDRs.” SEC.
Summary
Global Depositary Receipts are an essential instrument in international finance, facilitating cross-border equity investment and allowing companies to raise capital internationally. By understanding the characteristics, types, and implications of GDRs, investors and companies can make informed decisions to harness the benefits of global financial integration.
