Global Depositary Receipts (GDRs)

Depositary receipts (DRs) are certificates that represent an ownership interest in the ordinary shares of stock of a company, but that are marketed outside of the company's home country to increase its visibility in the world market and to access a greater amount of investment capital in other countries. Depositary receipts are structured to resemble typical stocks on the exchanges that they trade so that foreigners can buy an interest in the company without worrying about differences in currency, accounting practices, or language barriers, or be concerned about the other risks in investing in foreign stock directly.

American depositary receipts (ADRs) were the 1st depositary receipts issued—JP Morgan issued the 1st ADR in 1927. ADRs allowed companies domiciled outside of the United States to tap the United States capital markets. ADRs were structured to resemble other stocks on the American exchanges with comparable prices per share, shareholder notifications in English, and the use of United States currency for the sale and purchase of ADRs and for dividend payments.

A global depositary receipt (GDR) is similar to an ADR, but is a depositary receipt sold outside of the United States and outside of the home country of the issuing company. Most GDRs are, regardless of the geographic market, denominated in United States dollars, although some trade in Euros or British sterling. There are more than 900 GDR's listed on exchanges worldwide, with more than 2,100 issuers from 80 countries.

Although ADRs were the most prevalent form of depositary receipts, the number of GDRs has recently surpassed ADRs because of the lower expense and time savings in issuing GDRs, especially on the London and Luxembourg stock exchanges.
Bar chart showing the growth of global depositary receipts and the relative shinkage of American depositary receipts.
Source: JP Morgan

The Global Depositary Receipt as a Financial Instrument

A GDR is issued and administered by a depositary bank for the corporate issuer. The depositary bank is usually located, or has branches, in the countries in which the GDR will be traded. The largest depositary banks in the United States are JP Morgan, the Bank of New York Mellon, and Citibank.

A GDR is based on a Deposit Agreement between the depositary bank and the corporate issuer, and specifies the duties and rights of each party, both to the other party and to the investors. Provisions include setting record dates, voting the issuer's underlying shares, depositing the issuer's shares in the custodian bank, the sharing of fees, and the execution and delivery or the transfer and the surrender of the GDR shares.

A separate custodian bank holds the company shares that underlie the GDR. The depositary bank buys the company shares and deposits the shares in the custodian bank, then issues the GDRs representing an ownership interest in the shares. The DR shares actually bought or sold are called depositary shares.

The custodian bank is located in the home country of the issuer and holds the underlying corporate shares of the GDR for safekeeping. The custodian bank is generally selected by the depositary bank rather than the issuer, and collects and remits dividends and forwards notices received from the issuer to the depositary bank, which then sends them to the GDR holders. The custodian bank also increases or decreases the number of company shares held per instructions from the depositary bank.

The voting provisions in most deposit agreements stipulate that the depositary bank will vote the shares of a GDR holder according to his instructions; otherwise, without instructions, the depositary bank will not vote the shares.

GDR Advantages and Disadvantages

GDRs, like ADRs, allow investors to invest in foreign companies without worrying about foreign trading practices, different laws, accounting rules, or cross-border transactions. GDRs offer most of the same corporate rights, especially voting rights, to the holders of GDRs that investors of the underlying securities enjoy.

Other benefits include easier trading, the payment of dividends in the GDR currency, which is usually the United States dollar (USD), and corporate notifications, such as shareholders' meetings and rights offerings, are in English. Another major benefit to GDRs is that institutional investors can buy them, even when they may be restricted by law or investment objective from buying shares of foreign companies.

GDRs also overcome limits on restrictions on foreign ownership or the movement of capital that may be imposed by the country of the corporate issuer, avoids risky settlement procedures, and eliminates local or transfer taxes that would otherwise be due if the company's shares were bought or sold directly. There are also no foreign custody fees, which can range from 10 to 35 basis points per year for foreign stock bought directly.

GDRs are liquid because the supply and demand can be regulated by creating or canceling GDR shares.

GDRs do, however, have foreign exchange risk if the currency of the issuer is different from the currency of the GDR, which is usually USD.

The main benefit to GDR issuance to the company is increased visibility in the target markets, which usually garners increased research coverage in the new markets; a larger and more diverse shareholder base; and the ability to raise more capital in international markets.

GDR Market

As derivatives, depositary receipts can be created or canceled depending on supply and demand. When shares are created, more corporate stock of the issuer is purchased and placed in the custodian bank in the account of the depositary bank, which then issues new GDRs based on the newly acquired shares. When shares are canceled, the investor turns in the shares to the depositary bank, which then cancels the GDRs and instructs the custodian bank to transfer the shares to the GDR investor. The ability to create or cancel depositary shares keeps the depositary share price in line with the corporate stock price, since any differences will be eliminated through arbitrage.

The price of a GDR primarily depends on its depositary ratio (aka DR ratio), which is the number of GDRs to the underlying shares, which can range widely depending on how the GDR is priced in relation to the underlying shares; 1 GDR may represent an ownership interest in many shares of corporate stock or fractional shares, depending on whether the GDR is priced higher or lower than corporate shares.

Most GDRs are priced so that they are competitive with shares of like companies trading on the same exchanges as the GDRs. Typically, GDR prices range from $7 - $20. If the GDR price moves too far from the optimum range, more GDRs will either be created or canceled to bring the GDR price back within the optimum range determined by the depositary bank. Hence, more GDRs will be created to meet increasing demand or more will be canceled if demand is lacking or the price of the underlying company shares rises significantly.

Most of the factors governing GDR prices are the same that affects stocks: company fundamentals and track record, relative valuations and analysts' recommendations, and market conditions. The international status of the company is also a major factor.

On most exchanges, GDRs trade just like stocks, and also have a T+3 settlement time in most jurisdictions, where a trade must be settled within 3 business days of the trading exchange.

The exchanges on which the GDR trades are chosen by the company. Currently, the stock exchanges trading GDRs are the:

  1. London Stock Exchange
  2. Luxembourg Stock Exchange
  3. NASDAQ Dubai
  4. Singapore Stock Exchange
  5. Hong Kong Stock Exchange

Companies choose a particular exchange because it feels the investors of the exchange's country know the company better, because the country has a larger investor base for international issues, or because the company's peers are represented on the exchange. Most GDRs trade on the London or Luxembourg exchanges because they were the 1st to list GDRs and because it is cheaper and faster to issue a GDR for those exchanges.

Many GDR issuers also issue privately placed ADRs to tap institutional investors in the United States. The market for a GDR program is broadened by including a 144A private placement offering to Qualified Institutional Investors in the United States. An offering based on SEC Rule 144A eliminates the need to register the offering under United States security laws, thus saving both time and expense. However, a 144A offering must, under Rule 12g3-2(b), provide a home country disclosure in English to the SEC or the information must be posted on the company's website.

The Details of a GDR Purchase by An Investor

  1. An investor calls her broker to buy GDRs for a particular company.
  2. The broker fills the order by either buying the GDRs on any of the exchanges that it trades, or by buying ordinary company shares in the home market of the company by using a broker in the issuer's country. The foreign broker then delivers the shares to the custodian bank.
  3. The investor's broker notifies the depositary bank that ordinary shares have been purchased in the issuer's market and will be delivered to the custodian bank and requests depositary shares to be issued in the investor's account.
  4. The custodian notifies the depositary bank that the shares have been credited to the depositary bank's account.
  5. The depositary bank notifies the investor's broker that the GDRs have been delivered.
  6. The broker then debits the account of the investor for the GDR issuance fee.

The Details of a GDR Sale by an Investor

  1. An investor instructs his broker to sell his GDRs. The investor must deliver the shares within 3 business days if the shares are not in the street name of the broker.
  2. The broker can either sell the shares on the exchanges where the GDR trades, or the GDRs can be canceled, and converted into the ordinary shares of the issuing company.
  3. If the broker sells the shares on an exchange, then the broker uses the services of a broker in the issuer's market.
  4. If, instead, the shares are canceled, then the broker will deliver the shares to the depositary bank for cancellation and provide instructions for the delivery of the ordinary shares of the company issuer. The investor pays the cancelation fees and any other applicable fees.
  5. The depositary bank instructs the custodian bank to deliver the ordinary shares to the investor's broker, who then credits the account of its customer.

Technical Notes