Thursday, August 16, 2007

Depositary Receipts or Global Depositary Receipts

We all read about depositary receipts these days. It’s an important tool through which the foreign companies invest in the market. It is a negotiable financial security which is traded on the local stock exchange and usually as equity. These are issued by the companies listed in foreign exchange. This provides the facility to the investors to invest in equity of other countries.
The American Depository receipts are in circulation since 1920. They have gradually evolved into GDR (Global Depositary Receipts). Other popular depositary receipts are
European DRs and International DRs. The GDRs are commonly traded on the European stock exchanges. The GDRs are traded on the validity of the currency in the stock exchanges. The GDRs are usually created to list the already issued securities and debt shares in the other foreign exchanges across the globe. The laws of the country guide the procedure of listing the security on the exchange. IPO is also eligible for issuing GDR.
DRs are instruments of increasing the foreign trade. It not only helps in transferring the money but also the transfer of resources like technology, market procedures and increase transparency. Both the countries are benefited by the mutual transactions. The investors can invest in the global market from their own country. The risks associated are high but so are the returns. The investors don’t face the problem of going into to unfamiliar market for trade. But still the risks of foreign exchange or currency exchange are there. The company has multiple benefits by issuing the GDRs. The benefits are 1. Raising the Capital from world market help the company to attain global status. 2. Increase in the liquidity of the shares. 3. Opportunity for the foreign and the expatriate’s investors based abroad. 4. Solves the problem of barriers on the entry of foreign capital. Thus the company can raise the capital from the world market for its current procedures. The only risks associated with it are the foreign exchange rates.
Author : Ela Johri

1 comment:

raghav said...

good article
plz elaborate on the risks associated with exchange rates with some examples if u can ... thxx

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