Question

Explain the advantages of Global Depository Receipts (GDRs).

Answer 1

The main advantages of GDRs are as follows:

For issuing company:

1. Indian companies with good profit records can get attractive prices for their equity shares through GDRs. This results in a significant reduction in the cost of capital to the company.
2. Investors in GDRs become shareholders. Therefore, a depreciation in the value of the Indian rupee does not lead to any extra outflow for the company. It affects the profits of the foreign investor.
3. GDR issues enhance the image of the issuing company in international markets. This also provides a mechanism for raising capital or as a vehicle for an acquisition.
4. GDR enables the issuing company to raise capital in two or more countries simultaneously and enlarge its shareholder base.
5. Sale proceeds of GDR are received in foreign currency. This enables the issuing company to pay off its foreign exchange liabilities in respect of project cost, foreign currency loans, etc.

For investors:

1. GDRs provide an opportunity for foreign investors to diversify their investment portfolios. They can participate in the Indian capital market.
2. Global custodian/safekeeping charges are eliminated, saving investors 30 to 61 basis points annually.
3. GDRs overcome obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside their domestic markets.
4. GDRs are negotiable and liquid. An investor can at any time sell his GDR and raise money.
5. GDRs overcome foreign investment restrictions and are free from a cumbersome paper-based settlement system.
6. GDRs are easily sold on the stock exchange.