# What Is a Global Depositary Receipt (GDR)? Key Features and Examples

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## What Is a Global Depositary Receipt (GDR)?

A global depositary receipt (GDR) is a financial instrument issued by a depositary bank representing shares in a foreign company. GDRs enable international companies to access investors worldwide by listing on local stock exchanges outside their home markets. Through GDRs, companies can raise capital, and investors can gain exposure to foreign stocks with ease.

### Key Takeaways

*   Global depositary receipts (GDRs) allow companies to raise capital internationally by representing shares in foreign companies and trading on multiple global stock exchanges.
*   GDRs are typically priced in U.S. dollars but can involve currency risk as they represent underlying shares traded in local currencies.
*   Investors can benefit from portfolio diversification and trading convenience without the need for foreign brokerage accounts.
*   Compared to other foreign securities trading mechanisms, GDRs typically entail lower transaction costs and offer potential arbitrage opportunities.
*   Despite advantages, GDRs may involve significant administrative fees, currency conversion expenses, and potential liquidity risks.

## How Global Depositary Receipts (GDRs) Work

A global depositary receipt is a bank certificate that represents shares in an international company. These shares are kept with a depositary bank or [custodial institution](https://www.investopedia.com/terms/c/custodian.asp). Even though a company's shares trade as local shares in its country, global investors can buy these shares using GDRs.

GDRs help companies get capital from worldwide investors, usually denominated in U.S. dollars, though any currency is possible. GDRs are negotiable and traded in many markets, offering arbitrage opportunities to investors. When European investors trade shares of companies outside Europe, GDRs are called European Depositary Receipts (EDRs).

GDR transactions often cost less than other methods of trading foreign securities.

## Example of a Global Depositary Receipt

A U.S. company can list its stock on the London and Hong Kong Exchanges using a GDR. The U.S.-based company enters into a depositary receipt agreement with the respective foreign depositary banks. The banks then issue shares to their stock exchanges, following both countries' regulations.

> **Important**
>
> A depositary is an independent, third-party entity, such as a bank, that may act as a safekeeping facility and fiduciary. For instance, a depositary bank can provide stock-related services for a depositary receipt program.

## Key Features of Global Depositary Receipts

GDRs are exchange-traded securities that represent ownership of shares in a foreign company, where those actual shares are traded abroad.

GDRs can vary in characteristics, including:

*   **Number of shares:** Each GDR represents a certain number of company shares, which can change over time.
*   **Denomination:** Although they can, in theory, use any currency, GDRs are nearly always denominated in U.S. dollars. The Euro is the next most common currency. The currency of a GDR affects its price and risk, since overseas shares are priced locally.
*   **Sponsorship:** GDRs are issued by depository banks, and the specific bank that sponsors a GDR may vary from one GDR to another. Different banks may have different reputations, financial strength, and other characteristics that could impact the risks and potential returns of a GDR.
*   **Fees:** GDRs may also vary in terms of the fees that are charged for issuing, trading, or holding the GDRs. These fees can impact the overall cost and potential returns of an investment in a GDR.

## Important Considerations for Global Depositary Receipts

A GDR from a depositary bank represents a certain number of shares, from fractions to multiples, in a foreign company. The particular share makeup for a GDR depends on how attractive an investment it will be to local investors. For instance, in the U.S., a depositary bank would want to create GDRs with the number of shares, or fractions thereof, and associated U.S. dollar value that U.S. investors might be most comfortable with.

The depositary bank buys or receives shares of the company and bundles them. This bundle is represented by a GDR. The GDR is then issued by the depositary bank on a local stock exchange. The underlying shares remain on deposit with the depositary bank (or custodian bank in the international country).

The trading process involving GDRs is regulated by the exchange on which they trade. For example, in the U.S., global depositary receipts are quoted and trade in U.S. dollars. They also pay dividends with U.S. dollars. They're subject to the trading and settlement process and regulations of the exchange where their transactions take place.

Typically, GDRs are offered to institutional investors via a private offer, due to the fact that they can take advantage of exemptions from registration under the Securities Act of 1933. This makes GDRs an efficient and cost-effective way to access cross-border capital. In fact, because of their flexibility and efficiencies, issuers from regions such as the Middle East and Africa, Asia Pacific, Latin America, as well as Europe have increased their use of GDR programs to help them achieve the objectives they have for raising capital.  

## How to Trade Global Depositary Receipts

Companies issue GDRs to draw foreign investors. These GDRs trade on local exchanges, giving access to international markets. A custodian/depositary bank has possession of the GDRs underlying shares while trades take place, ensuring a level of protection and facilitating participation for all involved.

Brokers handle the buying and selling of GDRs for buyers. Generally, the brokers are from the home country and operate within the foreign market. The actual purchase of the [assets](https://www.investopedia.com/terms/a/asset.asp) is multi-staged, involving a broker in the investor's country, a broker located within the market of the international company, a depositary bank representing the buyer, and a custodian bank.

Brokers can also sell GDRs on an investor's behalf. Investors can sell them on exchanges, convert them to regular stock, or return them to the issuing company. Additionally, they can be canceled and returned to the issuing company.

Traders dealing in GDRs often compare the, for example, U.S. dollar price of the GDR with the U.S. dollar equivalent price of the shares trading on the international company's domestic exchange. They'll typically buy the less expensive security and sell the other. Eventually, this arbitrage trading activity causes the underlying shares and the GDRs to reach [parity](https://www.investopedia.com/terms/p/parityprice.asp).

> **Fast Fact**
>
> Due to the trading activity called arbitrage, a GDR's price closely tracks that of the international company's stock on its home exchange.

## Pros and Cons of Investing in Global Depositary Receipts

### Advantages

*   GDRs allow companies to reach a wider range of investors.
*   They can potentially increase share liquidity.
*   Companies can conduct an efficient and cost-effective private offering.
*   [Shares listed on major global exchanges](https://www.investopedia.com/terms/g/globalregisteredshare.asp) can increase the status or legitimacy of an otherwise unknown foreign company.
*   For investors, GDRs provide the opportunity to diversify portfolios internationally.
*   GDRs are more convenient and less expensive than opening foreign brokerage accounts and purchasing stocks in foreign markets.
*   Investors don't have to pay cross-border custody or safekeeping charges.
*   GDRs trade, clear, and settle according to the exchange and its country's domestic processes and procedures.
*   U.S. holders of GDRs realize any dividends and capital gains in U.S. dollars.

### Disadvantages

*   GDRs may have significant administrative fees.
*   Dividend payments are net of currency conversion expenses and foreign taxes.
*   The depositary bank automatically withholds the amount necessary to cover expenses and foreign taxes.
*   U.S. investors may need to seek a credit from the [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp) (IRS) or a refund from the foreign government's taxing authority to avoid double taxation on capital gains realized.
*   GDRs can be hard to sell if they have low liquidity.
*   In addition to liquidity risk, they can have currency risk and political risk.
*   GDR values can change due to events like recession, financial collapse, or political upheaval in a foreign country.

Pros

*   Easy to track and trade
    
*   Usually denominated in U.S. dollars
    
*   Regulated by local exchanges
    
*   Offers international portfolio diversification
    

Cons

*   More complex taxation
    
*   Limited selection of companies offering GDRs
    
*   Investors exposed indirectly to currency and geopolitical risk
    
*   Potential lack of liquidity
    

## GDRs vs. ADRs

### Global Depositary Receipts

Global depositary receipts allow a company to list its shares in more than one country outside of its home country. For example, a Chinese company might issue shares through a GDR program in London and the U.S. Each issuance must comply with all relevant laws in both the home country and foreign markets individually.

### American Depositary Receipts

On the other hand, an American depositary receipt, which also represents shares of an international company, lists only on U.S. stock exchanges. To offer ADRs, a U.S. bank will purchase shares on a foreign exchange. The depositary bank will hold the underlying shares and issue an ADR for domestic trading.

**Sponsored ADRs**

A bank issues a [sponsored](https://www.investopedia.com/terms/s/sponsoredadr.asp) ADR on behalf of a foreign company. The bank and the business enter into a legal arrangement. Usually, the foreign company pays the costs of issuing an ADR and retains control over it, while the bank handles the transactions with investors.

**Unsponsored ADRs**

A bank may also issue an [unsponsored](https://www.investopedia.com/terms/u/unsponsoredadr.asp) ADR. This certificate represents no direct involvement, participation, or even permission from the foreign company.

Theoretically, there could be several unsponsored ADRs for the same foreign company, issued by different U.S. banks. These different ADRs could also offer varying dividends. With sponsored programs, there is only one ADR, issued by the depositary bank working with the foreign company.

## What Is the Meaning of Global Depositary Receipt?

A global depositary receipt is a negotiable certificate issued by a bank. The certificate represents shares in a foreign company traded on a local stock exchange. GDRs give companies access to greater capital and investors the opportunity to invest in the equity of foreign companies.

## What Are Some Features of GDRs?

GDRs can be listed on multiple global stock exchanges, They also provide investors with the benefits and rights of the underlying shares, which could include dividends. GDRs trade like shares and can be bought and sold throughout the day via a standard brokerage account.

## What Is the Difference Between an ADR and a GDR?

An American depositary receipt represents shares in a foreign company and is listed only on American exchanges. A GDR represents shares in a company being on various foreign stock exchanges.

## What Is an Example of a GDR?

One example of a GDR is the American oil and gas company, Phillips 66 (NYSE: [PSX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PSX)). In addition to trading domestically, it has depositary receipts listed on exchanges in Brazil (P1SX34), Germany (R66), Vienna (PSXC), and London (0KHZ.L), among others.

## The Bottom Line

Global Depositary Receipts (GDRs) provide a valuable avenue for investors to diversify internationally by accessing equities in foreign companies through local exchanges. While these instruments entail risks such as economic and political instability in the home country, currency fluctuations, and potential liquidity challenges, they offer significant advantages. GDRs facilitate efficient trading and settlement under local regulations, bypass cross-border custody fees, and enable dividend collection in U.S. dollars. For investors seeking to expand their portfolio's reach and mitigate the complexities of direct international trading, GDRs can be a cost-effective and strategic option.

> **Article Sources**
>
> 1.  Citi. "[Global Depositary Receipts (GDRs): A Primer](https://depositaryreceipts.citi.com/adr/common/file.aspx?idf=1525)."
>     
> 2.  Internal Revenue Service. "[Foreign Currency and Currency Exchange Rates](https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates)."
>     
> 3.  Internal Revenue Service. "[Foreign Tax Credit](https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit)."
>     
> 4.  Yahoo Finance. "[Phillips 66 (P1SX34.SA)](https://finance.yahoo.com/quote/P1SX34.SA/)."
>     
> 5.  Yahoo Finance. "[Phillips 66 (R66.DE)](https://finance.yahoo.com/quote/R66.DE/)."
>     
> 6.  Yahoo Finance. "[Phillips 66 (PSXC.VI)](https://finance.yahoo.com/quote/PSXC.VI/)."
>     
> 7.  Yahoo Finance. "[Phillips 66 (0KHZ.L)](https://finance.yahoo.com/quote/0KHZ.L/)."