Global Depository Receipt

The global world has promoted shares and stocks investments across different countries. This has become an accelerated process with the global depository receipt. The global depository receipt stands as a guarantee for any country that invests in the foreign exchange of a different country.

The concept and understanding of global depository receipt may be a tackling one. It is because this kind of receipt is issued when there is an investment taken beyond the borders. But, it can be broken down and understood well with a simple example. 

Let us begin and try to explain the global depository receipt in detail. 

What Are Global Depository Receipts

In layman’s language, we can explain global depository receipts as receipts that are issued by banks of foreign companies when investment is done in foreign company stocks of another country. These receipts are issued by the domestic bank of the country where the investing entity is making the investment.

The global depository receipt works as the certificate for the country that enters the stock market of the different countries and buys shares. It becomes a representation of the shares in that foreign country where another country invests. 

Let us understand the topic with two examples. The first example of a global depository receipt denotes a hypothetical explanation. 

For example:

There are two countries, Country 1 and Country 2. Country 1 decides to invest in the stock and share market of Country 2. 

Country 1 invests in the domestic stock exchange of Country 2 and expects to gain profit. For this, Country 1 will have this particular share through the channel of Depository banks of Country 2. The Depository Bank of Country 2 will then issue a receipt, which is the Global Depository Receipt. The Depository Bank of Country 2 must set the ratio of GDRs according to its country share. This determines what value will Country 1 receive as it is done in terms of what appeals to investing parties. 

Let us now understand the global depository receipt (GDR) with examples of two foreign countries that have invested through GDRs.

For example: 

Indian company Reliance decides to invest in the stock exchange of the United Kingdoms. This will be done through the Depository bank of London in the United Kingdom. The Indian company, Reliance, can only invest with the companies that are mentioned on the London Stock Exchange.

Once Reliance decides to do so, the depository bank in London will generate the global depository receipt. This will stand as the certification for Reliance to receive its pre-decided amount of value, done by the depository bank in London. 

Features Of Global Depository Receipts

To explain the global depository receipts further, we must understand what features it holds. This will aid in in-depth understanding and add to our points to write a short note on global depository receipts. 

Below are the features that explain global depository receipts in detail. 

A Trading Exchange

Global depository receipt is a kind of trade. There is the exchange trade that takes place between two parties and in two different countries.

Once a country accepts the investments from the investing company, it then trades them to other countries, except for the USA. This is because the USA has its depository receipts, known as American Depository Receipts (ADR). 

GDR Has Conversion Ratio Scale

Every global depository receipt that is generated is done based on the ratio scale. This ratio scale is set by the depository banks and in favour of the investing party.

Usually, the conversion ratio means the countable quantity of shares the global depository receipt can hold. Generally, 1 GDR can hold up to only 10 shares; however, it varies based on the country. 

Lacks Security

Global depository receipt is a security that is not backed by any kind of assets. Here, the GDR only serves as a kind of certificate that the investment has taken place. It has no mention of either the value or the number of shares that the receiving party would get.

This becomes a bane for the company to invest with the domestic companies of the different companies that are on the stock exchange list. 

These are the 3 essential features of global depository receipt in detail. These will assist in explaining global depository receipts with the correct characteristics. 

A Short Note On Global Depository Receipts

Global depository receipt is the name entitled to the receipts that are generated after a certain type of investment. These receipts are generated by the depository banks of every country. These investments generally take place between two countries.

Receipts are generated when one country’s company decides to invest in the domestic company of another country. The investing company can only invest with the complaints mentioned in the other country’s stock exchange list. As A Consequence of the investment, the investor company trades with multiple other countries other than the USA. 

The global depository receipt holds the significance of bringing in interest for foreign investments. It is a lower-cost mechanism to invest in other countries. It is also a boon for the company to buy shares in the international market.

With a global depository receipt, the company can take the lead to invest in more than one international market. The global depository receipt also holds significance for a local company to find a place in international trade too. 

The global depository receipt stands out for being an exchange trade. Here, it is a market where the company can invest in the exchange market and earn valuable shares. It also has an established conversion ratio rate, which is decided by the depository banks of the country. 

However, global depository receipts come with a few loopholes too. It has no security backed by any asset. This can cause the shares to be exploited, as the receipts only guarantee that the investment has taken place. They do not mention the share amount or the value. 

Conclusion

Global depository receipt is the kind of receipts that are generated after an investment. These receipts are handed to the investing part of one country that invests in the domestic company of another country. The investment only takes place with the companies mentioned in the country’s stock exchange list. 

To explain global depository receipts, we must know their basic features too. There are 3 key features of this type of receipt. These are:

• A Trading Exchange

• GDR Has A Conversion Ratio Scale

• Lacks Security 

Along with it, there is also an example of how to write a short note on global depository receipts.