In Today’s world, investment opportunities are not geographically confined. Most investors are fascinated by the reports of unfolding economies and flourishing growth in several nations worldwide and wish to participate when it comes to investing in a number of them.
Excessive inflation and changes in the exchange rates can also ruin the investor’s investment. If investors are ready to face both the benefits and risks of investing globally, there are many ways in which they can introduce themselves to the foreign market. They are GDR’s and FCCB’s.
GDR vs FCCB
The main difference between GDR and FCCB is that GDR is equity instruments in the form of Depository Receipts that are created by the Overseas Depository Bank outside the domestic country and issued to the foreign investors. Whereas, FCCB’s are convertible debt instruments that help companies raise funds in foreign countries by issuing currencies different than the issuer’s home country.
Comparison Table Between GDR and FCCB (in Tabular Form)
| Parameter of Comparison | GDR | FCCB |
|---|---|---|
| Meaning | Global Depository Receipts is an instrument issued by a depository bank outside the domestic country in the form of a depository receipt or certificate. | Foreign Currency Convertible Bonds is a bond provided by an Indian company in foreign currency which can be convertible into equity shares or depository receipt. |
| Debt/equity capital | GDR’s is an equity capital representing the shareholders’ funds. | Under, FCCB’s the investors have an alternative when it comes to changing the bonds into equity or depository receipts since it is a quasi debt instrument. If the investors choose to hold the bonds as it is rather than changing it the company can guarantee the payments to the bondholders. |
| Mode of treatment | GDR is reckoned to be a Foreign Direct Investment. | FCCB is reckoned to be an External Commercial Borrowing. |
| Tax on dividends/interest | GDR holders are paid a dividend by the depository banks. The GDR holders are not accountable to pay any tax on such dividends. | FCCB holders are paid an interest by the Indian companies. The FCCB holders are liable to pay tax to such interest given by firms. |
| Dilution | Under GDR immediate dilution takes place. | It saves the risk of equity dilution since it would take place only when FCCB’s convert their debt into equity. |
What is GDR?
A Global Depository Receipt (GDR) is a general name given to a negotiable instrument (which consists of one or more additional shares and convertible bonds) issued abroad by a domestic company, with the help of an Overseas Depository Bank, to residents/investors outside the domestic territory to raise funds in the home country. Both the companies issue the shares only after agreeing with the law. Moreover, by issuing equity shares in a foreign country, a corporation can raise foreign exchange funds.
Features of GDR:
- Since Global Depository Receipts are exchange-traded instruments for numerous countries, they can trade on diverse stock exchanges at the same time.
- GDR certificates can consist of multiple shares differing from a mere decimal to a large integer depending on the investors. A GDR, in general, can contain up to only ten shares.
- GDR’s price is constructed on the cost of the securities, a tad bit higher with regards to negotiation costs, and so on so that the negotiator/middleman/broker can make a profit and the demand and supply in the stock market.
Advantages:
- When investors purchase shares in the form of GDR’s from foreign companies they are not required to pay any sort of tax. Hence, GDR saves the taxes of an investor.
- GDRs give widespread companies entrance to overseas investments through a comparatively easy method and also helps companies increase their perceptibility by issuing GDRs in several countries.
- Non-resident investors find trading very relatively simple since Global Depository Receipts can easily be transferred from one person to another without the need for heavy documentation like some other securities.
Disadvantages:
- Global Depository receipts are invested worldwide and these investors are liable to follow the guidelines of several commercial managers. It is necessary to follow these guidelines for a tiny error that could lead to severe consequences.
- Global Depository Receipts are exposed to the risk of variations in the foreign exchange rate. Inflation in the value of the overseas money can result in a loss to the holder of these shares.
- Since small investors might not be able to gain the benefits of lower transaction costs by issuing multiple numbers of shares in each Depository Receipt, in this situation, it’s beneficial to High Net-Worth Individual (HNI) investors since they can invest huge amounts and issue multiple shares in GDR.
What is FCCB?
FCCB (foreign currency convertible bonds) is a bond provided to the bondholders by companies, in currencies non-identical to their own. These bonds are convertible into equity shares immediately upon issue or maturity by the investors. The term of FCCB’s are for 5 years.
Main features of FCCB:
- FCCB makes principal payments till a certain period time after which, like any different form of bond, these bonds to are converted into equity.
- Another very important feature of FCCB’s are these are convertible bonds that provide the holder the right to convert FCCB’S to a depository receipt or equity after a given time.
- FCCB’s are special types of bonds that can be exchanged in the stock market.
Advantages:
- FCCB’s main guide/instruct the new markets to buy or sell bonds in the stock market which successively results in companies earning a large amount of money outside the home country.
- If the conversion of bonds into equity and depository receipts doesn’t end up being beneficial for the bondholders they enjoy the benefit of guaranteed payments on these bonds
- The dilution of the company is considered to be lower since the conversion of FCCB’s into equity happens at a price that is already determined at the time the company issues these bonds to the investors and these are usually at a premium.
Disadvantages:
- If the company is not doing so well in the market and stock prices depreciate, the bondholders may not convert the bond into equity. In such a troubled position the company could face the burden of paying interest and principal repayments to the bondholders. Hence FCCB’s are solely suitable in a bull market and not a bear market.
- Since FCCB’s are quasi debt instruments sometimes the bonds remain as a debt and do not end up getting converted into equity or a depository receipt. This appears on the liabilities side of the company’s balance sheet and is shown as debt until conversion.
- A fall in the value of the rupee against a foreign currency can make the interest and principal repayments costly which may end up being a huge expense for the companies.
Main Differences Between GDR and FCCB
- GDR is an instrument where an overseas depository bank issues equity shares to the residents of another country. FCCB is an instrument that is presented to the investors by enterprises in the currencies of different countries globally.
- GDR is an equity instrument that represents the funds of the shareholders. FCCB is a debt instrument where the bondholders can convert the bonds into shares or depository receipts and if the conversion is not beneficial, the bondholders can get secured payments from the bonds.
- GDR is also known as Foreign Direct Investments (FDI), that is, an investment made by a company in one country to a company in another country as a form of controlling ownership and FCCB’s are also known as External Commercial Borrowing (ECB), that is, an instrument used to raise money in foreign currency outside the country.
- The GDR holders need not pay any tax on the dividends paid by the overseas depository banks. The FCCB holders are accountable to pay tax on the interest paid by companies.
- GDR amounts to an immediate dilution. Dilution under FCCB’s are considered lower because dilution only takes place when the debt is converted into equity. This in turn, saves FCCB’s from the risk of equity dilution.
Conclusion
Our world economy offers a lot of opportunities when it comes to investing in foreign stocks. Investing in the foreign market will enable investors to broaden their outlook on investments. Business takes place globally and regardless of plenty of investment opportunities in an investor’s own country, the chance to engage and invest in developing economies apart from their own attracts these investors.
To access investors in stock markets outside their home country, methods like GDR and FCCB can be used as a source of raising foreign investments. This article consists of the differences between the two methods of issue of securities and talks about each of them in detail. It gives a glimpse of how FCCB’s are useful when it comes to boosting the country’s economic progress due to the availability of more money in the form of foreign currency. However, this technique also has its drawbacks when it comes to sudden depreciation in stock prices, and so on.
It also gives us a clear idea about how GDRs have turned out to be one of the exceedingly essential, expensive and, universally renowned approaches to increase funds from overseas stock exchange. It further gives us an insight into how it provides benefits not only by accessing native firms to overseas markets but also gives non-resident investors the chance to invest in local firms.
References
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1751461
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=928396