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A company may choose to use global depositary receipts, or GDRs, for financing to access more potential investors, with a financial asset that makes it easy for foreign investors to invest in the company. GDRs can be especially useful in cases where the company is not sure it can raise sufficient domestic equity capital or where it believes its business may be particularly appealing to foreign investors.

Depositary Receipts

Depositary receipts are certificates that represent ownership interest in a company’s common stock shares, marketed outside of the company’s home country. It is this marketing that provides the company with greater visibility in world markets and allows it to access larger amounts of investment capital in various countries. The structure of depositary receipts resembles the trading of average stocks on exchanges. This allows foreigners to buy interest in a company while avoiding worries associated with variances in currency, language barriers, differences in accounting processes and other risks involved with directly investing in foreign stocks.

There are two types of depositary receipts: American depositary receipts, or ADRs, and global depositary receipts. GDRs are similar to ADRs but are sold outside the United States and the issuing company’s home country. Global depositary receipts are generally denominated in U.S. dollars, regardless of their geographic market; however some trade in Euros.
Deposit agreements made between the corporate issuer and depositary bank form the basis of GDRs. These agreements outline for each party their specific rights and duties, both to the other involved parties and to investors. Provisions of the agreement include setting a record date, voting on the issuer’s underlying shares, sharing fees and the execution and delivery of the GDR shares.

GDRs significantly increase the visibility and public profile of foreign companies that may not ordinarily attract a great deal of investor attention. GDRs also allow such companies to broaden their shareholder base, thus opening up opportunities to raise additional capital. Such capital can be significant particularly to companies in emerging markets looking to obtain capital for rapid growth.

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