Difference between GDR and IDR

A Financial instrument is a document that can be real or virtual. It

represents a legal agreement that involves any kind of monetary value.
All forms of assets such as currencies, bonds, stock are all financial
instruments. The Depository Receipt (DR) is one such financial
instrument which is negotiable. It represents a foreign company’s
transactions in terms of debt. They are mentioned in the local stock
exchange to enable the trade of foreign securities in the form of either
ADR or GDR.

1. GDR – Global Depository Receipt

2. ADR – American Depository Receipt
3. IDR  –  Indian Depository Receipt

The main difference between IDR and GDR is that an Indian

Depository Receipt is a method for foreign companies to raise their
capital in India whereas Global Depository Receipt is
a certificate that a company uses to purchase the share of foreign
companies.

Comparison Table Between GDR and IDR (in Tabular Form)

Parameters GDR IDR

Negotiabilit GDR is negotiable all over the IDR is negotiable only within
y world. India.

A GDR is issued in European

Issued in An IDR is issued in India.
countries.

Purpose Helps companies to acquire To help the foreign companies

resources all over the world. to acquire the resources of
Parameters GDR IDR

India.

Listed in A GDR is listed in LSE. An IDR will be listed in NSE.

GDR will be applied by The Indiana companies will not

Application companies all over the world apply for Indian Depository
including India. Receipt.

 What is GDR?

Global Depository Receipt is commonly known as GDR.  It is also

known as European Depository Receipt and International Depository
Receipt. It is listed in LSE.

It might appear as similar to American Depository Receipt (ADR) but

here the stocks will be represented outside the U.S stocks.  The GDR
certificate will be issued by a depository bank. The numbers in this
certificate show the number of shares that a particular company owns in
its name.  A unique feature is that they will be traded as domestic shares
but they can be bought globally. This is a major attraction for foreign
investors. Hence the companies voluntarily buy these.  The value this
receipt is based on the current market value of this shares.

Advantages of Global Depository Receipt

1. An investor need not worry about the cross country practices while
it is issued with a GDR
 2. A GDR offers the voting rights to the holders who are issued with
it
3. When a company is issued with a GDR the trading becomes easier
4. The common language as English will be used in corporate
meetings. This helps in easier communication

What is IDR?

It is a financial instrument that helps foreign companies to expand the

funds in the Indian market. Unlike the ADR and GDR, an IDR will be
issued in the Indian denomination. This gives a chance for the Indian
companies to hold a share in the foreign company’s equity. Though a
company may have the GDR, the company needs to have an IDR if it
wants to extend the business in India.

Because the denomination of a Global Depository Receipt is in dollars

or Euro but in India the trade is done in Rupees. So it is required for a
company to obtain the Indian Depository Receipt. Though the issue if
IDR is reported to start from the year 2000, the original issue if the
certificate took only in 2010. Also IDR us mentioned in National Stock
Exchange as well as on the Bombay Stock Exchange.

Advantages of Indian Depository Receipt

1. The companies will have access to the liquid assets

2. The company need not worry about the hostile takeover when it
has an IDR
3. The major risk associated with foreign exchange is eliminated here
4. There is an advantage if exploiting the international demand for
shares that a company is holding with it

Main Differences Between GDR and IDR

1. An IDR is denominated in Indian Rupees but GDR is denominated
in Dollars or in Euro
2. Companies that invest in India should have an IDR though they
might have a GDR
3. The companies that invest in India through IDR will have to pay
the tax but a company that has invested I India through the GDR is
devoid of the taxes
4. The Indian Depository Receipt is economical when compared to
Global Depository Receipt if the company wanted to invest in
India
5. There is a lack of clarity in the issue of the Depository Receipt to
the companies under the Indian Depository Receipt. But to issue
the taxes under GDR, it is easier and has clarity

 
Conclusion

There is a need for DR in many countries nowadays. The banks are

always responsible for issuing the DR. Within a DR, irrespective of the
reputation of the company, the business is done by the company in a
foreign country will be considered as illegal. So the companies have to
make sure that they acquire a DR before thinking about the extension of
business in a foreign country. There are many procedures involved in
this process.

What are American Depository Receipts (ADRs)?

American Depository Receipts (ADRs) are a way of trading non-U.S.
stocks on the U.S. exchange. Through ADRs, Indian companies who are
willing to raise funds from the U.S. can do so by issuing shares on the
American Stock exchange.

However, the issuance of ADR is governed by the rules and regulations

as laid down by the regulator SEC (Securities and Exchange
Commission). The Indian Companies will have to maintain accounts as
per the American Standards.

The Indian companies cannot directly list their equity shares on the
international stock exchange. So in order to overcome this problem; the
companies give shares to an American bank. These American banks in
return for those shares provide receipts to the Indian companies.  The
companies raise funds by providing those ADR receipts in the American
share market.
How are ADRs created?

Indian companies cannot directly list their equity shares on the

international stock exchange.

So, in order to overcome this problem, the companies give shares to an

American bank.
These banks will take hold of the stock, and issue receipts to Indian
companies in return.

The companies raise funds by providing those ADR receipts in the

American share market. These ADRs are listed on the major stock
exchanges of the US, like NASDAQ. They can also be sold Over-The-
Counter (OTC).

Trading Mechanism of ADRs

One ADR comprises a certain number of shares in an Indian company
and these ADRs are quoted in US dollars. The investors of a foreign
country can buy and sell shares directly and the investor is free to
convert the ADR to receive the equivalent number of shares.
For example, an American citizen willing to invest in Infosys limited in
the U.S. can do so by purchasing ADR from the listed entity.

As an investor, they will receive all the dividends and capital gains in
US dollars, no matter where the original company is from.

What are the Types of ADRs available to Investors?

All ADRs are categorized into two broad categories –

1. Sponsored ADRs
A sponsored ADR is created through an agreement between a non-
American company and an American bank.

Here, the company handles all the costs related to the issuing of the
receipts in the American markets.

In return, the American bank handles all transactions between the

company and the American investors through depository receipts.

These ADRs, like normal company shares, offer voting rights to their
holders.

2. Unsponsored ADRs
These ADRs are created by American banks without the involvement or
the permission of a non-American company.

Because of this, different banks can issue unsponsored ADRs for the
same company as well.

However, since they don’t involve the company’s participation, they are
usually traded over-the-counter or OTC.

They also don’t offer voting rights to their shareholders.

These ADRs are further categorized into three more types –

 Type I ADR: These are only to establish a presence in the American
market. They don’t permit the raising of funds.
 Type II ADR: These cannot be used to raise funds, but they are
permitted to have a higher visibility and trading volume than Type I
ADRs.
 Type III ADR: These are a prestigious category of ADRs. The
companies issuing these are allowed to raise funds and float an IPO on
the American stock markets as well.
What are Global Depository Receipts (GDRs)?
GDRs are similar to ADRs except for the fact that it is listed on an
exchange outside the U.S. and helps the issuer to raise funds
simultaneously in different markets i.e. it allows the foreign firms to
trade on the exchange outside its home country.

These shares are held by a foreign bank that provides depository receipts
to these companies in return for the shares.

How are GDRs created?

The process of creating a GDR is quite similar to an ADR.

Companies can approach depository banks of various countries and

make an agreement with them.

In exchange for the companies handling the costs associated with trading
in different markets, the banks will handle all transactions between the
investors and the GDRs of the company.

Trading Mechanism of GDRs

GDRs act as negotiable certificates. Therefore, they are usually traded
just like shares of a company in any international market.

A single GDR can represent different amounts of shares, as per the

company’s needs and objectives.
 GDRs can also be used to raise capital from countries in the form of US
Dollars or Euros. When GDRs are traded in Euros, they are known as
European Depository Receipts or EDRs.

What are the Types of GDRs available to Investors?

There are two broad categories of GDRs –

1. Rule 144A GDRs

These GDRs are those which operate through the rule 144A of the
Securities Exchange Commission (SEC) of the US. This rule allows
non-American companies to trade and raise capital in the American
Markets.
It also makes these GDRs a cheaper alternative to raising capital from
American markets than Level III ADRs.

2. Regulation S GDRs
These GDRs are those which help non-American companies raise funds
and establish a trading presence in the European markets only.

These GDRs usually trade on the London or Luxembourg Stock

Exchange only and are popularly known as Reg S GDRs. Only non-
American investors can trade in Reg S GDRs.

A company can issue both Reg S and Rule 144A GDRs, but they will be
subject to different laws.

Differences between ADR and GDR

 American Depository Receipt (ADR) is a depository receipt which is
issued by a US depository bank against a certain number of shares of
non-US company stock. Whereas Global Depository Receipt (GDR) is a
depository receipt which is issued by the international depository bank,
representing foreign company’s stock.
 Foreign companies can trade in US stock market, through various bank
branches with the help of ADR. Whereas GDR helps foreign companies
to trade in any country’s stock market other than the US stock market.
 ADR is issued in America while GDR can be issued in both America
and Europe.
 ADR is listed in American Stock Exchange i.e. New York Stock
Exchange (NYSE) whereas GDR is listed in non-US stock exchanges
like London Stock Exchange or Luxembourg Stock Exchange.
 ADR can be traded in America only while GDR can be traded in all
around the world.
 ADR Market is more liquid as compared to GDR market
 Investor’s participation is more in ADR as compared to GDR
 ADR market is a retail investor market whereas GDR’s market is
institutional one.
 ADR’s disclosure agreements are more onerous as compared to GDR.
 Pros and Cons of ADRs and GDRs
Depository receipts are a unique way of raising funds for companies and
a unique investment for diversified portfolios.

However, before we invest in them, we should consider the pros and

cons of using ADRs and GDRs for both investors and the issuing
companies.

Pros:
1. They provide access to investments in the foreign markets, thus
becoming a great way to diversify our portfolio.
2. They are denominated in US Dollars and Euros, both of which are very
powerful currencies to hold investments in.
3. Since they are treated like shares, they can easily be traded in markets.
They also offer all shareholder benefits to different investors.
4. For companies, depository receipts are a great way to attract positive
international attention and expand their base of shareholders as well.
Cons:
1. Depository receipts are one of the most expensive ways to raise capital
for companies.
2. Since all transactions are happening in foreign currencies, the
investments and capital are subject to the volatility of the foreign
exchange or forex market.
3. Depository receipts are only suitable for High Net Individuals as high
amounts of capital are needed to trade in them.
4. There are a limited number of companies which offer their shares in the
form of depository receipts, thus leaving lesser choices for interested
investors.