IGNOU : M.COM : IBO 6 : UNIT 2 : Q - 3. a) How are GDRs priced ? b) What are the characteristics of GDRs ?

Ans. A GDR is an instrument to raise equity capital in multiple markets outside the issuers domestic market through one security - which is traded in a foreign stock market. A GDR may represent one or more shares and the holder can at any time convert it into the number of shares it represents. The underlying shares are already listed in the domestic stock exchange and the depository release them from its original inventory. Till conversion they do not carry direct voting rights (may do so through the depository).

Issuers have found it advantageous as a GDR programme expands the market for its shares through a broadened, liquid and more diversified exposure which increases or stabilizes the share price. It enhances the issuing companies image and propels it into a global stage. GDRs are quoted in US Dollars. After a period of 45-180 days, referred to as a "cooling off period", a GDR becomes a fungible i.e., the investor may sell his GDR. The holder simply instructs its depository to cancel the GDR. The Depository (overseas) asks its custodian (say-in India) to release shares to the counterparty and the custodian releases the share certificates - which are delivered in the (Indian) market. The custodian completes the settlement process, receives the money through the local stock exchange settlement system, adjusts for the capital gains tax and remits the foreign .exchange equivalent at the prevailing market rate to the US dollar account of the investor abroad. Instead of directly dealing with the foreign depository, the investor may go through an intermediary (foreign broker), who would co-ordinate the settlement process, receives the remittance from the Indian Custodian and credits the investors account. In effect the investor has sold his GDR and received the dollar value.