Global Depositary Receipt (GDR)

A global depositary receipt (GDR) is a negotiable certificate issued by a depositary bank that represents a fixed number of shares in a company from another country. The underlying shares are held by a custodian in the company's home market, and the receipts are offered to investors in one or more international markets, where they trade and settle like local securities, usually in US dollars or euros. GDRs allow a company to raise capital and gain foreign shareholders without a full listing of its ordinary shares abroad.

A GDR is one form of depositary receipt. The best-known form, the American depositary receipt, is offered to investors in the United States; a GDR is typically offered in two or more markets at once, with listings most often in London or Luxembourg. The first GDR is generally dated to 1990. Issuers have come mainly from emerging markets in Asia, Eastern Europe, the Middle East and Latin America.

Three parties are involved. The issuer deposits shares with a local custodian appointed by the depositary bank. The depositary then issues receipts against those shares under a deposit agreement, which sets the ratio of shares to each receipt, the rights of holders and the fees. The ratio is chosen so that the receipt trades at a price convenient for international investors; one GDR may represent a fraction of a share or many shares.

GDRs are usually sold in two tranches. One is offered outside the United States under Regulation S, and the other is placed privately with large US institutions under Rule 144A, which exempts sales to qualified institutional buyers from registration with the Securities and Exchange Commission. Receipts are held in book-entry form and settle through the international depositories Euroclear and Clearstream, or through the US depository for the 144A tranche.

Receipts are normally convertible in both directions. An investor can surrender GDRs to the depositary, pay a cancellation fee and receive the underlying shares in the home market, and local shares can be deposited to create new GDRs, subject to any limits in local law. This two-way link allows arbitrage to keep the GDR price close to the home-market price after adjusting for the exchange rate.

For issuers, a GDR programme gives access to a deeper pool of capital than the home market can supply, raises international visibility, and can be used as currency for acquisitions. The offering is typically arranged by investment banks through book building, in the same way as an initial public offering. Disclosure requirements for GDRs admitted to institutional market segments have generally been lighter than for a primary listing of shares.

For investors, GDRs offer exposure to foreign companies without opening accounts in the home market, dealing in the local currency or navigating local settlement and registration rules. Dividends are collected by the depositary, converted and paid in the GDR currency, net of local withholding tax and fees. Corporate actions are passed on as far as the deposit agreement and securities laws allow.

A GDR holder is the beneficial owner of the underlying shares but is not on the company's share register; the depositary or its nominee is the registered holder. Voting is exercised by instructing the depositary, which votes the deposited shares accordingly, and the deposit agreement states what happens to shares for which no instruction is received. Rights that cannot lawfully be offered to holders in certain countries, such as pre-emption rights in a rights issue, may be sold by the depositary and the proceeds distributed.

Holders bear depositary fees for issuance, cancellation, dividend processing and sometimes an annual service charge. They are exposed to the exchange rate between the home currency and the GDR currency, since the receipt's value follows the local share price. Liquidity in the GDR may be much lower than in the home market.

Political and legal risk can be decisive. Home-country limits on foreign ownership or on conversion can cause GDRs to trade at a premium or discount. In 2022, sanctions and Russian countermeasures led to the suspension of trading in Russian companies' GDRs in London and to a Russian law requiring the termination of depositary programmes, leaving many holders unable to trade or convert for an extended period.

In the United Kingdom, GDRs are admitted to the official list and trade on the London Stock Exchange, including on its international order book. In the European Union, a prospectus approved under the Prospectus Regulation is required for admission to a regulated market. Home-country rules also apply: India, for example, has its own framework for depositary receipt issuance, and China has permitted GDR listings in London, Switzerland and Germany under its stock connect schemes.