Global Depositary Receipt (GDR)

A global depositary receipt (GDR) is a negotiable financial certificate issued by a depositary bank that represents ownership of shares in a foreign company. GDRs let companies raise capital and list securities on exchanges outside their home market, while giving investors a way to buy foreign equity without opening foreign brokerage accounts.

Key takeaways

• GDRs represent underlying foreign shares held by a depositary or custodian bank.
• They are typically denominated in U.S. dollars (but can use other currencies).
• GDRs trade on local exchanges under that exchange’s rules and help investors diversify internationally.
• Prices of GDRs and the underlying shares are kept close by arbitrage activity.
• Risks include currency exposure, political and country risk, fees, taxation, and possible low liquidity.

How GDRs work

• A depositary bank acquires or holds a bundle of a foreign company’s shares with a custodian in the company’s home market.
• The bank issues GDRs that represent a specified number (or fraction) of those underlying shares.
• GDRs are listed and traded on one or more foreign exchanges, denominated and settled according to that exchange’s rules.
• Investors buy and sell the GDRs through brokers. The depositary bank handles dividends and corporate actions for the GDR holders, converting payments into the GDR currency and deducting applicable taxes and fees.
• Price parity between the GDR and the underlying local shares is maintained by arbitrageurs who buy the cheaper instrument and sell the more expensive one.

Key features

• Representation: Each GDR maps to a defined number (or fraction) of underlying shares.
• Denomination: Most GDRs are in U.S. dollars; euros are also common.
• Sponsorship: A depositary bank sponsors and issues the GDR. Sponsor reputation and costs vary.
• Tradability: GDRs are exchange-traded and can be bought via ordinary brokerage accounts.
• Fees & charges: Issuance, custody, conversion, and withholding taxes can reduce net returns.

Trading GDRs

• Trading involves the investor’s broker, a broker in the issuer’s domestic market, the depositary bank, and the custodian.
• GDRs can be converted back into the underlying shares (subject to the depositary agreement and local rules) or canceled and returned to the issuer.
• Active arbitrage keeps GDR prices aligned with the home-market share price (adjusted for currency and ratio).

Example

A U.S. company can use GDRs to list on exchanges such as London or Hong Kong. For instance, a large U.S. corporation has used depositary receipt programs to list on multiple foreign exchanges, allowing local investors to trade its equity without directly accessing its home market listing.

Pros and cons

Advantages
* Easier access for international investors to foreign equities.
* May increase liquidity and visibility for the issuer.
* Avoids the need for investors to open foreign brokerage accounts.
* Trading, settlement, and dividends occur in the GDR’s local currency and under the local exchange’s rules.

Disadvantages
* Administrative and conversion fees and withholding taxes reduce returns.
* Currency risk: the GDR’s value reflects both the underlying share and exchange-rate movements.
* Potential political, regulatory, and country-specific risks.
* Some GDRs have low liquidity, making them harder to buy or sell without moving the price.
* Tax complexity: investors may need to claim foreign tax credits or refunds to avoid double taxation.

GDRs vs. ADRs

• GDRs: Can be listed on multiple exchanges outside the issuer’s home country and are used for cross-border listings across regions.
• ADRs (American Depositary Receipts): Specifically designed for trading foreign shares on U.S. exchanges. ADRs are issued by U.S. banks and come in sponsored (with issuer involvement) or unsponsored (without the issuer’s direct involvement) forms.

Important considerations for investors

• Understand the depositary agreement: conversion mechanics, fees, and rights (dividends, voting).
• Account for currency conversion and foreign withholding taxes.
• Check liquidity and average trading volume before investing.
• Consider political and macroeconomic risks in the issuer’s home country.
• Compare the GDR price (converted into your currency) with the home-market share price to understand potential arbitrage and parity issues.

Conclusion

GDRs are a practical tool for companies seeking international capital and for investors wanting foreign equity exposure without direct access to foreign markets. They provide convenience and diversification but carry additional costs and risks—currency, tax, liquidity, and country-specific factors—that investors should evaluate before investing.