GLOBAL DEPOSITORY RECEIPT (GDR),American depositary receipt (ADR)

 

GLOBAL DEPOSITORY RECEIPT (GDR) :

• Global Depository Receipt (GDR), is a certificate issued by a Depository Bank (Depository Bank of  London) which purchases shares of foreign companies (TCS) and deposits them in their account. 
• GDRs represent ownership of number of  shares belonging to a  foreign company (TCS).
• GDR's are commonly used by investors in developed markets to invest in companies from emerging markets .

To Understand:

Let there is an investor "X" in Britain  & wishes to invest in any INC "TCS"

        Depository Bank of  London will purchase TCS share 

                           ⇓

        "X" will purchase TCS share from Depository Bank of  London

                           ⇓

                  Depository Bank of London will issue GDR to X.

Advantages of GDR to issuing company:

• Increase the accessibility to foreign capital markets,
• Increase in the visibility of the issuing company globally
• Rise in the capital because of foreign investors

Advantages of GDR to investor: 

• Diversification of investment, hence reducing risk
• Providing an opportunity for the investor to invest in foreign companies

American depositary receipt (ADR):

• GDR in case of USA is known as ADR.
• It is a Negotiable certificate issued by a U.S. bank against  shares in a foreign stock (eg stock of any Indian  company being traded at US stock exchange ) that is traded on a U.S. exchange. 
• ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. 
• ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.

Advantages of GDR for US investor:

• ADRs are an easy and cost-effective way for US investors  to buy shares in a foreign company. 
• They save money by reducing administration costs and avoiding foreign taxes on each transaction. 

Advantages of GDR to issuing company:

Foreign entities get more U.S. exposure, allowing them to tap into the wealthy North American equities markets.