Global Depositary Receipt (GDR)

What Is a Global Depositary Receipt (GDR)?

A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company. GDRs list shares in two or more markets, most frequently the U.S. market and the Euromarkets, with one fungible security.

GDRs are most commonly used when the issuer is raising capital in the local market as well as in the international and US markets, either through private placement or public stock offerings. A global depositary receipt (GDR) is very similar to an American depositary receipt (ADR), except an ADR only lists shares of a foreign country in the U.S. markets.

Understanding Global Depositary Receipt

A global depositary receipt (GDR) is a type of bank certificate that represents shares in a foreign company, such that a foreign branch of an international bank then holds the shares. The shares themselves trade as domestic shares, but, globally, various bank branches offer the shares for sale. Private markets use GDRs to raise capital denominated in either U.S. dollars or euros. When private markets attempt to obtain euros instead of U.S. dollars, GDRs are referred to as EDRs.

Investors trade GDRs in multiple markets, as they are considered to be negotiable certificates. Investors use capital markets to facilitate the trade of long-term debt instruments and for the purpose of generating capital. GDR transactions in the international market tend to have lower associated costs than some other mechanisms that investors use to trade in foreign securities.

A U.S.-based company, for instance, that wants its stock to be listed on the London and Hong Kong Stock Exchanges can accomplish this via a GDR. The U.S.-based company enters into a depositary receipt agreement with the respective foreign depository banks. In turn, these banks issue shares in their respective stock exchanges based on the regulatory compliance for both of the countries.

Shares Per Global Depositary Receipt

Each GDR represents a particular number of shares in a specific company. A single GDR can represent anywhere from a fraction of a share to multiple shares, depending on its design. In a situation that involves multiple shares, the receipt value shows an amount higher than the price for a single share. Depository banks manage and distribute various GDRs and function in an international context.

The depositary bank will set the ratio of GDRs per home-country share at a value that they feel will appeal to investors. If the value is too high, it could deter some investors. Conversely, if it is too low, investors may think the underlying securities resemble riskier penny stocks.

Trading of Global Depositary Receipt Shares

Companies issue GDRs to attract interest from foreign investors. GDRs provide a lower-cost mechanism in which these investors can participate. These shares trade as though they are domestic shares, but investors can purchase the shares in an international marketplace. A custodian bank often takes possession of the shares while the transaction processes, ensuring both parties a level of protection while facilitating participation.

Brokers who represent the buyer manage the purchase and sale of GDRs. Generally, the brokers are from the home country and are sellers within the foreign market. The actual purchase of the assets is multi-staged, involving a broker in the investor's homeland, a broker located within the market associated with the company that has issued the shares, a bank representing the buyer, and the custodian bank.

If an investor desires, brokers can also sell GDRs on their behalf. An investor can sell them as-is on the proper exchanges, or the investor can convert them into regular stock for the company. Additionally, they can be canceled and returned to the issuing company.

Because of arbitrage, a GDR's price closely tracks that of the company's stock on its home exchange.

GDRs vs. ADRs

Global depositary receipts allow a company to list its shares in more than one country outside of its home country. For example, a Chinese company could create a GDR program that issues its shares through a depositary bank intermediary into the London market and the United States market. Each issuance must comply with all relevant laws in both the home country and foreign markets individually.

An American depositary receipt (ADR), on the other hand, only lists the company's shares on U.S. stock exchanges. To offer ADRs, a U.S. bank will purchase shares on a foreign exchange. The bank will hold the stock as inventory and issue an ADR for domestic trading. A bank issues a sponsored ADR on behalf of a foreign company. The bank and the business enter into a legal arrangement. Usually, the foreign company will pay the costs of issuing an ADR and retaining control over it, while the bank will handle the transactions with investors.

Sponsored ADRs are categorized by what degree the foreign company complies with U.S. Securities and Exchange Commission (SEC) regulations and American accounting procedures. A bank may also issue an unsponsored ADR. However, this certificate has no direct involvement, participation, or even permission from the foreign company. Theoretically, there could be several unsponsored ADRs for the same foreign company, issued by different U.S. banks. These different offerings may also offer varying dividends. With sponsored programs, there is only one ADR, issued by the bank working with the foreign company.

Advantages and Disadvantages of GDRs

The main advantage for issuers of GDRs is that their shares can reach a broader and more diverse audience of potential investors, and with shares listed on major global exchanges it can increase the status or legitimacy of an otherwise unknown foreign company. For investors, it provides an easy way to gain international diversification in a portfolio without having to open up foreign brokerage accounts and dealing with exchange rates. Depositary receipts are simply more convenient and less expensive than purchasing stocks in foreign markets.

Taxation, however, can be a bit complicated. U.S. holders of GDRs realize any dividends and capital gains in U.S. dollars. However, dividend payments are net of currency conversion expenses and foreign taxes. Usually, the bank automatically withholds the necessary amount to cover expenses and foreign taxes. Since this is the practice, American investors would need to seek a credit from the IRS or a refund from the foreign government's taxing authority to avoid double taxation on any capital gains realized

Another potential downside to global depositary receipts includes potentially low liquidity, meaning there are not many buyers and sellers, which can lead to delays in entering and exiting a position. In some cases, they may also come with significant administrative fees. Investors still also have economic risks since the country that the foreign company is located in could experience a recession, bank failures, or political upheaval. As a result, the value of depository receipt would fluctuate along with any heightened risks in the foreign county.

Frequently Asked Questions

What Is the Meaning of Global Depositary Receipt?

A depositary receipt (DR) is a negotiable certificate issued by a bank representing shares in a foreign company traded on a local stock exchange. The depositary receipt gives investors the opportunity to hold shares in the equity of foreign countries and gives them an alternative to trading on an international market. A depositary receipt, which was originally a physical certificate, allows investors to hold shares in the equity of other countries. A global depositary receipt (GDR) is one that is issued by a foreign company on more than one international market, for instance in the U.K. and the Eurozone.

What Are Some Features of GDRs?

Aside from being listed across multiple global markets, GDRs also may 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 (ADR) is essentially a GDR that is issued by a foreign company but only is listed on American exchanges. A GDR would entail listings on more than one foreign market.

What Is an Example of a GDR?

One example of a GDR is the American oil & pas company Phillips 66 (NYSE: PSX). In addition to its domestically traded shares, it also has depositary receipts listed on exchanges in Brazil (P1SX34), France (R66), Vienna (PSXC), and London (0KHZ.L), among others.