What Is a Global Depositary Receipt?
A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company.
Understanding Global Depositary Receipt
A global depositary receipt (GDR) is very similar to an American depositary receipt (ADR). It 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, which they generally refer to as capital 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.
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.
Trading of Global Depositary Receipt Shares
Companies issue GDRs to attract interest by 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.