What are the Characteristic features of Global Depository Receipt?


Global Depository Receipt (GDR) :
GDR can can be defined as a foreign currency denominated derivative instrument in the
form of depository receipt created outside India and issued to non-resident investors
entitling them to the benefits of specific number of ordinary equity shares or fully
convertible bonds of a domestic company.
The Characteristic features are as follow :
1. GDR’s are issued to investors in more than one country and may be denominated in
any acceptable freely convertible currency.
2. GDR’s are issued to investors by the depository bank and not the issuing company.
This means that in the books of issuing company, the depository bank appears as the
shareholder. GDR holder therefore does not acquire any voting rights. The voting
rights accrue only to the depository bank.
3. Although the GDR is quoted and traded in a foreign currency the underlying shares
are denominated in INR. Thus the GDR derives its value through the price of the
underlying shares and the current exchange rate. It is therefore exposed to exchange
rate risk.
4. GDR holders have the option of cancelling GDR’s and arranging sale of the
underlying shares in the domestic market if the international price is less than the
corresponding domestic price. This provision can however be used only after a
“Cooling off” period of 45 days from the date of the issue.
5. GDR holders are entitled to all corporate benefits available to equity holders such as
dividend, bonus and rights in the same proportion as their entitlement.
6. The foreign currency funds acquired by the company through a GDR issue are
permitted to be used for any normal business activity, but cannot be used for trading
in international securities or real estate.
The advantages of a GDR issue are :
a. It eliminates the equity funding risk. This is because GDR holders do not
acquire voting rights, and therefore the promoters are not in danger of losing
management control.
b. Companies having international operations are able to build a brand image
which helps in their marketing efforts.
c. Investors have the benefit of having access to good quality companies in other
countries without political risk, operational risk and excessive regulatory control.

d. Through a GDR issue the company is able to create a potential demand for its
shares at the international level which results in a higher valuation for its shares
in the domestic market. This results in a higher PE ratio which reduces the cost
of capital.
Indian companies with a good financial track record of three years arc readily allowed
access to international markets though such issues. Clearances are required from
the Foreign Investment Promotion Board (FIPB) and the Ministry of Finance.

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