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.
Also, companies would always like to expand their services all around the world. The Depository Receipt is highly helpful for that purpose.
The forms of DR are
- GDR – Global Depository Receipt
- ADR – American Depository Receipt
- IDR – Indian Depository Receipt
GDR vs IDR
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 |
|---|---|---|
| Negotiability | GDR is negotiable all over the world. | IDR is negotiable only within India. |
| Issued in | A GDR is issued in European countries. | An IDR is issued in India. |
| Purpose | Helps companies to acquire resources all over the world. | To help the foreign companies to acquire the resources of India. |
| Listed in | A GDR is listed in LSE. | An IDR will be listed in NSE. |
| Application | GDR will be applied by companies all over the world including India. | The Indiana companies will not apply for Indian Depository 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
- An investor need not worry about the cross country practices while it is issued with a GDR
- A GDR offers the voting rights to the holders who are issued with it
- When a company is issued with a GDR the trading becomes easier
- 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
- The companies will have access to the liquid assets
- The company need not worry about the hostile takeover when it has an IDR
- The major risk associated with foreign exchange is eliminated here
- There is an advantage if exploiting the international demand for shares that a company is holding with it
Main Differences Between GDR and IDR
- An IDR is denominated in Indian Rupees but GDR is denominated in Dollars or in Euro
- Companies that invest in India should have an IDR though they might have a GDR
- 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
- The Indian Depository Receipt is economical when compared to Global Depository Receipt if the company wanted to invest in India
- 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.
The banks are always keen on it. They also make sure of the debts acquired by the company. The banks keep a check with the limit of the debts. Only under with the limited debts, the companies are issued with a DR quite easily. Hence the GDR, ADR, and IDR play a very crucial role in foreign contracts.
References
- https://iopscience.iop.org/article/10.1088/0954-3899/25/1/002/meta
- http://vslir.iima.ac.in:8080/jspui/handle/11718/12929