Global Depositary Receipts - Explained
What is a Global Depositary Receipt?
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Table of ContentsWhat is a Global Depositary Receipt?How Does a Global Depositary Receipt Work?Shares Per Global Depositary ReceiptTrading of Global Depositary Receipt Shares
What is a Global Depositary Receipt?
A Global Depository Receipt (or GDR) is a certificate issued by a bank that purchases shares of a foreign company and creates a security on local exchanges that are backed by these shares.
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How Does a Global Depositary Receipt Work?
A GDR is the global equivalent of an American Depositary Receipt (ADR). This certificate represents shares in a foreign company, such as a foreign branch of an international bank. The bank then holds these shares and trades the receipts as domestic shares. On a global scale, many bank branches provide these receipts for sale. GDRs are used by private markets to increase capital that is denominated in euros or dollars. When these private markets target to obtain euros, it is called GDRs or EDRs. The GDR, as a type of negotiable certificate, is traded by investors in several markets known as capital markets. These markets, as the name suggests, are used to provide the trade of long-term debt instruments and for generating capital. In an international market, the transactions involving GDRs have lower associated costs as compared to other trade options for foreign securities.
Shares Per Global Depositary Receipt
As each GDR is indicative of a specific number of shares in a company, depending on its design, a single GDR can range from a fraction of a share to several shares. When multiple shares are involved, the receipt value is higher as compared to a single-share GDR. GDRs are managed and distributed in an international context by the depository banks.
Trading of Global Depositary Receipt Shares
To draw interest from foreign investors, GDRs are issued by companies. It is a low-cost method which allows investors to invest in these foreign shares. The trade of these shares is just like that of domestic shares but they are purchased in an international marketplace. The purchase and the sale of GDRs is managed by the representative broker. Usually, the brokers belong to the home country, and they act as sellers in the foreign market. The purchasing of a GDR is a multistep process. It involves a local broker for the investor, a broker in the marketplace where the company issued its shares, a bank that represents buyers and the custodian bank. During the transaction, a custodian bank (escrow agent) holds possession of the shares. This ensures that both the parties are protected during the transaction. A broker can also sell GDRs on the investors behalf. They can be sold as-is on the exchange or they can be converted into regular stock of the company. In addition, they can also be cancelled and sent back to the issuing company.