In this blogpost, Harsha Jeswani, Student, National Law Institute University, Bhopal writes about the global depository receipts, its procedure and use.

INTRODUCTION

Depositary receipts (DRs) are negotiable financial instruments that are traded on domestic stock exchange. The individuals holding depository receipt are considered to have an ownership interest in the shares of the company like ordinary shareholders. The difference is that these are the receipts which are traded outside the home country of the company to increase the visibility of the company in the global world and to expand the capital investment in other countries.

The holders of GDRs are entitled to all the rights of a shareholder with respect to dividend and capital gains and can be purchased and sold like other securities. This enables the investors in any country to purchase the securities of any other country without any currency or language barriers.

GLOBAL DEPOSITORY RECEIPTS

Global Depository Receipts or GDRs are certificates that are nowadays becoming popular among the investors to access the global stock market. The companies have also accepted it as one of the ways to list its securities in foreign markets. The concept of GDRs is based on American Depository Receipts (ADRs) which were the first depository receipts issued in 1927. It allowed the companies outside the USA to have access to capital markets of the USA.

A global depositary receipt (GDR) is similar to an ADR, but is a depositary receipt sold outside the United States and outside the home country of the issuing company. These are widely used nowadays by almost all the companies in the world to gain accessibility to the capital markets of the world. India is no exception. Many companies in India have expanded their market to foreign platforms with the help of GDRs and gained access to investment capital overseas.

PROCEDURE INVOLVED

A GDR is issued in the same manner as a financial instrument. It is administered by a depository bank to the corporate issuer. The bank is generally located in the countries in which the GDR is traded. A GDR is often considered as a Deposit Agreement between the bank issuing it and the holder of GDR. The agreement specifies the rights and duties of each party. There is a separate Custodian bank which holds the shares of the company that underlie the GDR. The depository bank then buys the shares and deposits the shares in the custodian bank. These shares are then issued in the form of GDRs representing ownership in these shares.

The custodian bank which is situated in the country of the issuer has a duty for safe keeping the shares of the GDR. It is generally the depository bank which selects the custodian bank which then collects the dividend and forwards any notice of the issuer to the depositary bank, which then sends them to the GDR holder.

Global depository receipts (GDRs) as tradable instruments are becoming increasingly popular in the hands of institutional investors worldwide and an accepted option for companies to access global equity markets. India is no exception, and a number of Indian companies have spread their presence to foreign bourses through GDRs and gained access to investment capital overseas.

POPULARITY OF GDR

So the question that arises for consideration is why these GDRs are becoming so popular these days. This is because GDRs are the type of financial instruments which derive its value from the equity shares of the issuer company. Further, the holder of GDR has an option to convert his GDRs to a proportionate number of shares. The underlying feature of GDRs is that it has many features of shares such as the right of the holder to receive dividends and also voting rights in a company if provided in GDRs Agreements. Apart from this, another advantage of GDR is that is capable of being traded as a security in a more investor-friendly currency thus leading to more liquidity. Thus, any outsider investor who wishes to invest in the stock of any Indian company would prefer GDRs as their natural choice since GDRs are exempted from tax in India unless they are converted into shares.

The procedure of issuing GDRs by an Indian company involves issuing of its equity shares (in Rupees) to the depository bank situated in a foreign country and then the issue of GDRs by the depository bank against the said equity shares to the foreign investors in foreign currency. The physical possession of the equity shares is entrusted to a domestic custodian bank, which is an agent of the depository bank.

The depository bank is recognised as the registered owner of the equity shares of the company in its books since these shares are issued to the depository bank. The holders of GDRs have an option to exchange their GDRs for the equity shares of the company and such holders then become the owner of the equity shares of the company.  Since at the beginning it is the depository bank holding the equity shares, hence it has all the voting rights given to any equity shareholder.

Before 2005, all companies were permitted to issue GDRs, however, post 2005, certain amendments were made as a result of which now only listed companies can make issuance of GDRs in foreign markets. It depends on the company whether they want to offer GDR as a public issue or as a private placement to selected group of individuals. Similarly, GDR holders have certain benefits over preferential shareholders. Also certain types of GDRs issuances enjoy an exemption from the open offer requirements under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as long as they are not converted into equity shares.

Looking to the benefits associated with the issuance of GDRs, there are many companies in India such as Tata Steel Ltd, Reliance Industries, Sterlite Industries India Ltd., that have realised the importance of GDRs as a means for raising foreign direct investment and this number is likely to increase in future.

CONCLUSION

It can be said that the use of GDRs enables individuals to have access to the capital markets of the foreign company without any concerns regarding currency, language, or tax laws. The issuance of GDRs increases the liquidity of the firms. Further, the holder of GDRs has same rights as that of equity shareholders. Companies that issue GDRs benefit as well, by gaining access to more potential investors. The companies have an opportunity to raise additional capital GDRs offer the opportunity to broaden the company’s base of shareholders and to raise additional capital. This helps the company in emerging markets thereby increasing the prospects of such company to grow.