BTL - 708 - Depository Receipts - GDR; ADR and IDR

 

The Banking Tutor’s Lessons

BTL 708                                                                          27-09-2024

Depository Receipts - GDR; ADR and  IDR

Depositary receipts are shares of a foreign company offered in another foreign market. Depositary receipts can be structured in multiple ways and allow foreign investors to invest in foreign companies through their own domestic exchanges.

If a company wants to offer its equity shares in a foreign market it must work with a depositary bank. This means the underlying company seeking to raise money through the specially structured share issuance must partner with a depositary bank to do so. As an intermediary, the depositary bank manages the share issuance, administration aspects of the share listing, and other details involved with the shares being offered. The underlying company does not necessarily have direct access to manage their depositary receipt shares in the same way that they manage their domestic shares.

Shares of foreign stocks offered in foreign markets are comprehensively known as Depositary Receipts.

ADRs and GDRs are two types of depositary receipts with other types including European depositary receipts (EDRs), Luxembourg depositary receipts (LDRs), and Indian depository receipts (IDRs).

ADRs are shares of a single foreign company issued in the U.S.

GDRs are shares of a single foreign company issued in more than one country as part of a GDR program.

Companies can issue Depositary Receipts in individual countries or they may choose to issue their shares in multiple foreign markets at once through a GDR.

Global Depositary Receipts (GDRs)

A global depositary receipt is one type of depositary receipt. Like its name, it can be offered in several foreign countries globally. Depositary receipts only offered in a single foreign market will typically be titled by that market’s name, such as American depositary receipts, discussed below, and EDRs, LDRs, or IDRs.

Global depositary receipts are typically part of a program that a company builds to issue its shares in foreign markets of more than one 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.

A global depositary receipt (GDR) is a negotiable financial instrument issued by a depositary bank. It represents shares in a foreign company and trades on the local stock exchanges in investors' countries. GDRs make it possible for a company (the issuer) to access investors in capital markets beyond the borders of its own country.

GDRs are commonly used by issuers to raise capital from international investors through private placement or public stock offerings.

A global depositary receipt is very similar to an American depositary receipt (ADR) except that an ADR only lists shares of a foreign company in U.S. markets.

Using GDRs, companies can raise capital from investors in countries around the world. GDRs can in theory be denominated in any currency, but are nearly always in U.S. dollars. Since GDRs are negotiable certificates, they trade in multiple markets and can provide arbitrage opportunities to investors.

GDRs are generally referred to as European Depositary Receipts, or EDRs, when European investors wish to trade locally the shares of companies located outside of Europe.

GDR transactions tend to have lower costs than some other mechanisms that investors use to trade in foreign securities.

American Depositary Receipts

On the other hand, an American depositary receipt, which also represents shares of an international company, lists only on U.S. stock exchanges. To offer ADRs, a U.S. bank will purchase shares on a foreign exchange. The depositary bank will hold the underlying shares and issue an ADR for domestic trading.

Sponsored ADRs

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 pays the costs of issuing an ADR and retains control over it, while the bank handles the transactions with investors.

Unsponsored ADRs

A bank may also issue an unsponsored ADR. This certificate represents no direct involvement, participation, or even permission from the foreign company.

American depositary receipts are shares issued in the U.S. from a foreign company through a depositary bank intermediary. ADRs are only available in the United States. In general, a foreign company will work with a U.S. depositary bank as the intermediary for issuing and managing the shares.

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 company being on various foreign stock exchanges.

Indian Depository Receipts (IDRs)

Indian Depository Receipts (IDRs) are a financial bridge connecting domestic investors with international markets. They are born when Depository Receipts (DRs) find issuance within India and secure a listing on an Indian Stock Exchange, all backed by foreign stocks, offering a gateway to diverse investment possibilities.

Basis for IDRs:

The foundation of IDRs lies in two distinct structures. They can either stem from existing shares already issued by the company, where shareholders offer their shares at a grant price for conversion into DRs, a scenario referred to as a sponsored issue. Alternatively, new shares can be specifically issued for the DR offering, broadening the investment horizon.

Benefits for Companies:

Companies opting for IDRs gain invaluable access to an extensive international investor base. Allowing their shares to trade as DRs expands their global reach, attracting investments from markets that might have been out of reach due to various constraints.

Global Investment Accessibility:

For international investors, IDRs open doors to investing in companies that were previously inaccessible. These investors can now navigate international stocks seamlessly through domestic exchanges, utilizing their existing brokers and local currency for hassle-free transactions.

Investor Advantages:

Investors holding IDRs are entitled to dividends and capital appreciation from the underlying shares. It is pertinent to note, however, that they do not possess voting rights, setting this investment avenue apart in its unique offering.

In essence, IDRs epitomize the fusion of global investment opportunities and domestic market accessibility, creating a mutually beneficial scenario for both companies and investors.

Sekhar Pariti

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