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What is GDR in accounting?
GDR stands for Global Depository Receipts. It is an instrument in which a company in one country issues its shares or convertible bonds in another country. It is a depository receipt, where the security certificate is issued by financial intermediaries (like depository bank), purchases the security and then creates bank certificate and finally selling them in the stock exchange.
Some of Indian companies who have GDRs are −
- Bombay Dyeing
- Axis Bank
- HDFC
- India bulls housing etc.
Mechanism of GDR is explained below −
If a firm make an agreement with overseas depository bank for purpose of issue of GDR. Then depository bank makes a custodian agreement with a domestic custodian of a firm.
Then domestic custodian will hold equity shares of a firm.
With instruction domestic custodian, overseas depository bank will issue shares to foreign investors
These are carried under strict guidelines.
Normalised currency used in GDRs are U.S. dollars.
Characteristics of GDRs include −
Exchange traded − Intermediary buys large quantity shares of a foreign company and then trade on lock stock by creating GDRs.
Conversion Ratio − Conversion ratio is flexible; it depends on how intermediary is planning to target. Generally, one GDR can hold from a fraction to high number.
Unsecured − These are unsecured securities as they are not backed by any assets other value in the certificate.
Price based on underlying − Price will depend on demand and supply of a particular GDR. If the price is higher than the value of securities (transaction costs etc.), intermediary will gain profits.
Advantages of GDRs are −
- Liquidity.
- Access to foreign capital.
- Easily transferrable.
- Potential forex gains.
Disadvantages of GDRs are −
- High regulation.
- Forex risk.
- Suitable for HNIs.
- No voting rights.
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