Global Depository Receipts

A Global Depository Receipt (GDR) is a certificate issued by a

depository bank to a non- resident investor and is representative of
ownership of the underlying shares. GDRs facilitate trade and are used
to invest in companies from developing markets. GDR issue is the best
way of raising finance from foreign countries. An Indian company
cannot sell its shares in foreign capital market without GDRs. In
essence, a GDR represents an equity- linked financial instrument
deriving value from the underlying shares of the issuer company.
Indian companies such as ICICI Bank, Hindalco, Ranbaxy Laboratories,
Wipro, HDFC Bank etc have issued GDRs.

Process of issuing GDR

An Indian company can issue its equity shares denominated in Indian
rupees to a depository bank overseas. A GDR is issued against the said
equity shares by the depository bank to non- resident investors in
foreign currency. The physical possession of the equity shares is given
to a domestic custodian bank which is an agent of the depository bank.

Nature of GDR holding

Since the equity shares are issued to the depository bank, it is the
depository bank that is noted as the registered owner of the equity
shares in the register of the issuer company. The GDR holder has the
right to exchange the GDR for the underlying shares and upon such an
exchange, the GDR holder is registered as the owner of the equity
shares of the issuer company. Since the depository bank is initially the
registered owner, the voting rights are exercisable only by the
depository bank. However, GDR issuances generally stipulate that the
voting rights should be exercised by the depository bank either in
accordance with the voting instructions of the GDR holder or in
accordance with the voting instructions of the board of the issuer
company. The GDR issuance may also require the depository bank to
contractually agree to abstain from voting.
Ministry of Corporate Affairs (MCA) vide its General Circular No. 1/2009
[No.17/67/2009 CL-V] dated 16th June 2009 has clarified that a GDR
holder is not a member as under section 41(1) and 41(2) of the
Companies Act 1956 as a GDR holder’s name is not entered in the
register of members. Also, under section 41(3) of the Companies Act,
an Overseas Depository Bank is neither a depository under
Depositories Act nor holds shares as a beneficial owner. Therefore,
holder of GDR may become a Member only on Transfer or Redemption
into Underlying Equity Shares. Though the underlying shares on
transfer/redemption is allotted to Overseas Depository Bank, it cannot
be considered as nominee of GDR holder for the purpose of Section 41
& 42 of Companies Act, 1956
Legal Framework for GDR issue
• Till 2005 even unlisted companies could make GDR issuances,
subject to relevant regulations. However, after 2005 only listed
companies are eligible to make GDR offerings abroad.
• Under the Foreign Exchange Management (Transfer or issue of
security by a person resident outside India) Regulations, 2000,
an Indian company is permitted to issue shares to a depository
bank abroad for the purpose of issuing GDRs. However, such
issue of shares is subject to the fulfillment of conditions such as
approval from Ministry of Finance, the company should be
eligible to issue shares to persons resident outside India under
these regulations and the GDR issue should be in accordance
with the Issue of Foreign Currency Convertible Bonds and
Ordinary Shares (through depository receipt mechanism) scheme
1993.
• Under these FEMA regulations, the issuer company has to furnish
complete details of the issue to Reserve Bank of India within 30
days of closing of the issue and the company is required to make
quarterly returns within 15 days of the close of the calendar
quarter.
• The Issue of Foreign Currency Convertible Bonds and Ordinary
Shares (through depository receipt mechanism) scheme 1993,
provides the definition of the following terms such as Domestic
Custodian Bank, Global Depository Receipts, Overseas
Depository Bank. Domestic Custodian Bank defined under
regulation 2(a) of this scheme is a banking company which acts
as a custodian for Foreign Currency Convertible Bonds (FCCBs) or
ordinary shares of an Indian company which are issued by it
against a global depository receipt or a certificate. A Global
Depository Receipt defined under regulation 2(c) is any
instrument in the form of a certificate or a receipt which is issued
by the overseas depository bank to a non- resident investor. An
Overseas Depository Bank defined under regulation 2(e) is a
bank authorized by the issuer company to issue GDRs against
issue of FCCBs or ordinary shares.
 • An issuing company desirous of raising foreign funds by issuing
foreign currency convertible bonds is required to obtain
permission from the Department of Economic Affairs, Ministry of
Finance, Government of India.
• An approved intermediary as defined under the 1993 scheme
would be an investment banker registered with Securities and
Exchange Commission in the USA or Financial Services Authority
in UK or any other regulatory authority in Germany, France,
Singapore, Japan.
• An issuing company seeking permission should have a good
track record for three years upon which an approval for finalizing
the issue structure would be given to the company by the
Department of Economic Affairs. Once the issue structure is
finalized in consultation with the Lead Manager to the issue, final
approval will be obtained from the Department of Economic
Affairs. A Lead Manager is a person responsible for marketing the
issue, he advises the issuer on the type of security to be issued,
rate of interest, price of security etc.
• FCCBs shall be denominated in any convertible foreign currency
and ordinary shares in Indian rupees. A GDR may be issued in
negotiable form and may be listed on any Stock Exchange for
trading outside India.
• The pricing with respect to GDR issue will be either of the
following-
a) Average of weekly high and low of closing prices of the
related shares quoted on the stock exchange over last 6
months.
b) Average of weekly high and low of closing prices of the
related shares quoted on the stock exchange over two
weeks preceding the relevant date.
• GDRs may be listed on any overseas stock exchanges, over the
counter exchanges or through book entry transfer systems. Such
receipts may be purchased, possessed and freely transferred by
non- resident Indians.

Taxation under GDR issue

Advantages of GDR issuances

GDR issuances have certain timing and pricing benefits which are not
available to ordinary preferential allotments made by listed companies.
Ordinary preferential allotments by listed companies are required to be
at a minimum price of the preceding six months’ average or two
weeks’ average stock price (whichever is higher), calculated with
reference to a date which falls 30 days prior to the date of the general
meeting of the issuer company authorizing such preferential allotment.
Further, an ordinary preferential allotment by a listed company is
required to be closed within a period of 15 days from the date of the
aforesaid general meeting. Considering that the convening of a general
meeting of a listed company requires a minimum notice of three
weeks, the 15-day limit for allotment of shares leaves very little
flexibility to an issuer company. In contrast, for a GDR offering, the
minimum price prescribed is the two weeks’ average stock price
preceding the date of the board meeting of the issuer company
wherein the board decides to open the proposed issue. Further, the
completion of a GDR issuance, upon receipt of the necessary corporate
approvals, is not restricted to any prescribed time period. Accordingly,
the board of the issuer company, vis-à-vis a GDR issuance, has been
granted that extra elasticity, so it can determine the date of opening of
the GDR issuance and freeze the price of the GDR issuance based on
the market conditions as a reflection of investor appetite.