Difference Between ADR and GDR

Edited by Diffzy | Updated on: June 06, 2023

       

Difference Between ADR and GDR

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Introduction

A receipt known as a "Global Depository Receipt" is sent to the investor when a foreign organization or investor invests in a domestic company that is required to be listed in the local stock exchange of that particular country's medium of exchange through a domestic bank or depository. As a result, ‘DRs’ are actual certificates that let investors hold equity stakes in other nations. These investments can help a portfolio become more diversified and give investors a wider range of options when looking for the stocks with the highest potential returns. In this article, we will discuss two of the depository receipt that are usually used in the finance world- ADR (American Depository Receipt) and GDR (Global Depository Receipt). Indian businesses frequently use ADR and GDR to raise money on the international capital market. The main distinction between an ADR and a GDR is that an ADR is issued, whereas a GDR is listed on an exchange.

ADR- A negotiable certificate known as an American Depository Receipt (ADR), issued by a US bank, and valued in US dollars, represents securities of a foreign business trading on the US stock market. A claim is made by the receipts against the underlying shares. American investors are offered ADRs for purchase. US investors can make investments in non-US corporations through ADRs. The ADR investors receive a $1 dividend payment. We can easily transfer them too without any stamp duty process, and it also transfers the underlying shares along with it.

GDR- Global Depository Receipts, often known as GDRs, are tradable securities that can be utilized to access the economic markets of multiple nations with only one security. A specific number of shares in a foreign firm are represented by the receipts, which are released by the depository bank in many countries. By giving the bank the receipts, owners of GDR can transform them into shares. The business proposing to issue GDRs obtains the Ministry of Finance's and the FIPB's (Foreign Investment Promotion Board) prior approval.

ADR vs GDR

The main difference which one can remember to distinguish between the two terms is that ADR stands for American Depository Receipts and they are necessary for any non-US company if they want to trade in the US stock market. On the contrary, the GDR stands for Global Depository Receipts and they are necessary for any outside of the nation’s company if they want to invest in any other country’s share market for dealing in stock.

Difference between ‘ADR’ and ‘GDR’ in tabular form

Parameters of comparison‘ADR’GDR
DefinitionThe New York Stock Exchange uses ADRs as a means of trading non-US stocks. ADRs allow Indian companies that want to raise finance in the US to do so by offering shares on the American stock exchange.GDR is a type of bank certificate; it functions like equity in a foreign corporation. It is a means by which a company can get funds from the global market. A depository bank that is not in the company's country of residence issues GDRs.
Full formAmerican Depository ReceiptGlobal Depository Receipt
Relevant forIt is only for foreign companies that want to trade in the US stock market.It can be used to trade in any country’s stock market except the US.
Place of issueIt is usually issued in the US domestic capital market.It is issued at the European capital market.
Included inIt is listed on the American stock exchange such as the New York stock exchange, etc.It is generally listed on the London stock exchange or Luxemburg stock exchange.
Currency usedUS dollars are used for the trade.Along with US dollars, euros are also used.
PurposeTo obtain resources in the US market.To obtain resources from all the international markets.
Type of marketIt focuses on a retail investor market.It focuses on an institutional market.
ExamplesICICI Bank
Wipro ADR
Infosys ADR
Ambuja Cement
Axis Bank
Apollo Hospital

What is ‘ADR’?

Shares from a foreign firm issued in the United States via a depositary bank are known as American depositary receipts. The only place where ADRs are available is in the US. A foreign business will often issue and manage the shares through a U.S.-based depositary bank acting as the intermediary. J.P. Morgan invented the first ADR in 1927. This was done to make it possible for Americans to purchase stock in a British department store. The shares of corporations with locations in over 70 different nations are represented by over two thousand ADRs that are now on the market.

 ADRs are traded on numerous exchanges in the United States, including the NASDAQ and the New York Stock Exchange. To issue ADRs, foreign corporations and the intermediaries of their depositary banks must abide by all applicable U.S. laws. As a result, both exchange regulations and U.S. securities laws apply to ADRs. ADRs can come with some special risks for American investors. mainly the threat of currency exchange associated with dividend payments. ADRs are otherwise denominated in U.S. dollars, but the valuation used to determine their first offering value is based on their native currency. The value of a single ADR might range from a single share to a fraction of a share in a foreign corporation. The answer is contingent upon the business and the relevant foreign exchange rate. This makes it possible for businesses to translate pricing into dollars that are more suitable for American exchanges.

 This market has more liquidity as compared to GDR, along with high investor participation. These types of agreements can sometimes be burdensome to manage. This market is beneficial for retail investor marketers.

Advantages-

  1. There are many opportunities for companies to expand their reach to the US market and claim maximum profits.
  2. It can help companies to create a strong investing network and better financing for their growth.
  3. Investors may save money on commissions by making investments in other nations.

Disadvantages-

  1. The investors may face some threats in case of exchange rates.
  2. According to American depository banks, that impose an additional commission but do not apply it to every deal, investors must pay greater commissions.
  3. When things are volatile, you might need to exercise caution.

What is ‘GDR’?

A specific kind of depositary receipt is a global depositary receipt. It can be purchased worldwide, just like its name suggests, in many international nations. Depositary receipts, such as American depositary receipts, and EDRs, LDRs, or IDRs, which are only provided in a single foreign market, will often be titled by that market's name. Investment in international markets is GDR's primary goal. To obtain a GDR, a firm must designate an overseas bank to act as an intermediary on their behalf. This is necessary if the company intends to increase its revenue from international markets. As a result, they can distribute the shares on the organization's behalf without running into any difficulties.

GDRs provide trading in several nations, in contradiction to ADRs, which indicate the potential for trading in the shares of foreign corporations that are listed on US stock markets. Additionally, GDRs provide transactions on the International Order Book, which gives investors the chance to have direct access to GDRs from more than 30 different nations.

For Ex- A company from India seeking to purchase on the Italy Stock Exchange. They must appoint an Italy depositary bank to act as their middleman to accomplish that. Because of this, they can issue shares on behalf of the company from Italy on behalf of the domestic custodian without running into any difficulties.

Through the usage of a GDR, Indian businesses with an excellent track record of financial stability for at least three years are easily granted access to international financial markets. The Foreign Investment Promotion Board and the Ministry of Finance permits are nevertheless necessary.

Advantages-

  1. Companies can invest in any stock market of any international country except for the US.
  2. It helps the companies to obtain the greatest retention rate and contribute to increasing the issuing company's visibility.
  3.  Possibility for the issuing company to raise money courtesy to international investors.

Disadvantages-

  1. The conduct of any kind of illegal activity can cause harm to the company’s reputation at an international level causing company to have serious repercussions.
  2. Compared to the native country's agency, dividends paid in this type of receipt are volatile since they are paid on the foreign market.
  3. For any business, a GDR might be an extravagant source of funding.
  4. It is advantageous and profitable for investors who can invest a significant sum in GDR.

Main differences between ADR and GDR (in points)

  • The full form of both words is as follows: ADR- American Depository Receipt GDR- Global Depository Receipt
  • Depository receipts, or ADRs, are issued by US depository banks in return for a specific number of shares of stock in non-US corporations that are traded on the US stock exchange. A GDR is an instrument of trade issued by an international depository bank that represents shares in a foreign company that is being sold on the global market.
  • Foreign corporations can trade on the US stock exchange through several different bank branches with the use of ADR. In contrast to the US stock market, GDR enables overseas businesses to trade in any other nation's stock exchange.
  • The issuing of ADR occurs in the American stock market whereas GDR is issued in the Europe stock market.
  • The New York Stock Exchange or the National Association of Securities Dealers Automated Quotations (NASDAQ) are American Stock Exchanges where ADRs are listed. GDR, on the other hand, is traded on non-US stock exchanges including the London Stock Exchange and the Luxembourg Stock Exchange.
  • The negotiation of ADR can only take place in the American market whereas GDR can be negotiated anywhere in the world.
  • The Securities Exchange Commission has strict guidelines on ADR disclosure requirements, which are onerous. In contrast to GDRs, whose requirements for disclosure are less onerous.
  • If we talk about the market, the ADR market is a market for retail investors, where investor involvement is substantial and the shares of a company are valued appropriately. Unlike the GDR, which has a less liquid market that is institutional.

Conclusion

The best option to invest in international markets is through Depository Receipts, which also allow access to stock markets in any country. To increase their wealth and gain the most global footprint possible, any foreign person or organization can invest in a variety of markets. In emerging markets, it offers the possibility of economic growth, which will be helpful for the advancement of the economies that are lagging. This article discussed two different kinds of depository receipts available for any organization to opt for that are- ADR (American Depository Receipt) and GDR (Global Depository Receipt). After reading this article you might get an overview of- What ADR and GDR are, their basic definitions, the key differences between them so that the user knows where to invest and how, the advantages and disadvantages that occur while using them, and their working in the stock market respectively.

An American Depository Receipt is a transferable certificate reflecting securities of a foreign business trading on the American stock market. It is issued by a US bank and is denominated in US dollars. The receipts represent an entitlement against the number of underlying shares. American investors have the option of purchasing ADRs. US investors have access to non-US corporations through ADRs. The dividend, which is given to ADR holders in US dollars, is paid. ADRs can be transferred easily and without paying any fees. The number of underlying shares is automatically transferred when an ADR is transferred.

GDR or Global Depositary Receipt is a kind of bank certificate that can be used to purchase stock in international corporations. It is a method for a corporation to obtain equity from the global market.

 GDRs are distributed by a depository bank that is situated abroad, or, to put it another way, GDRs are issued to citizens of that nation by a depository bank that is situated beyond the company's local borders.

 Most GDR trades take place on the European Market. The greatest method for obtaining equity from abroad is to issue GDR.

References

  1. https://byjus.com/commerce/difference-between-adr-and-gdr/  
  2. https://www.investopedia.com/ask/answers/072315/what-are-differences-between-global-depositary-receipts-gdrs-and-american-depositary-receipts-adrs.asp  
  3. https://www.stockdaddy.in/blog/difference-between-adr-and-gdr  
  4. https://www.5paisa.com/finschool/course/fundamental-analysis-advance-module/risk-return-of-equity-debt-securities/  
  5. https://bank.caknowledge.com/adr-gdr-complete-guide/

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