The Role of Global Depository Receipts in Raising International Capital

When an Indian company wants to raise money from investors in London, Luxembourg, or Singapore, it does not need to list directly on a foreign stock exchange. Instead, it can use a Global Depository Receipt, or GDR, a financial instrument that lets a company tap international capital while keeping its shares registered at home. GDRs have quietly funded some of India’s largest corporate expansions, and understanding how they work is essential for anyone studying company law and share capital.

What exactly is a Global Depository Receipt 🔗

A GDR represents ownership of a fixed number of a company’s shares, but it is issued and traded outside the company’s home country. The Companies Act, 2013 gives this instrument a precise legal identity. Under Section 2(44), a Global Depository Receipt is defined as any instrument in the form of a depository receipt, created by a foreign depository outside India and authorised by the company making the issue.

In simple terms, an Indian company issues its equity shares (denominated in rupees) to an overseas depository bank through a domestic custodian bank. The overseas depository then bundles these shares into receipts and sells them to investors on a foreign exchange, typically the London Stock Exchange or the Luxembourg Stock Exchange. The investor holding the GDR does not own the Indian share directly; they own a certificate that represents it, and this certificate can later be converted into the underlying share if the holder chooses.

GDR versus ADR 🔗

Students often confuse GDRs with American Depository Receipts (ADRs). Both work on the same underlying principle, but ADRs are listed exclusively on US exchanges and fall under the stricter disclosure regime of the US Securities and Exchange Commission. GDRs can be listed on multiple non-US exchanges simultaneously, which is why companies such as Tata Steel and Larsen & Toubro have GDRs listed on both the London and Luxembourg exchanges at the same time.

The legal architecture behind GDRs 🔗

A GDR issue is not governed by one law alone. It sits at the intersection of company law, foreign exchange regulation, and securities law, and a student of Company Law needs to know how these three pieces fit together.

The Companies Act and the GDR Rules, 2014 🔗

Section 41 of the Companies Act, 2013 empowers a company to issue depository receipts in a foreign country, subject to conditions prescribed by the Central Government. These conditions were laid out in the Companies (Issue of Global Depository Receipts) Rules, 2014, which require the receipts to be issued by an overseas depository bank appointed by the company, with the underlying shares held in custody by a domestic custodian bank. The rules also require the company to appoint a merchant banker or a practising professional to oversee compliance, and a report on this compliance must be placed before the board immediately after the issue closes.

RBI’s Depository Receipts Scheme, 2014 🔗

Foreign exchange aspects of a GDR issue are governed separately. The Depository Receipts Scheme, 2014, notified by the Department of Economic Affairs, provides the comprehensive framework under which Indian companies raise capital from permissible foreign jurisdictions against eligible securities. This scheme replaced the older 1993 framework and widened the pool of companies, including unlisted ones, that could access this route, subject to conditions on which jurisdictions qualify as “permissible.”

SEBI’s role and the 2019 framework 🔗

The Securities and Exchange Board of India oversees the securities-market dimension of a GDR issue. After the 2014 scheme struggled with implementation gaps, SEBI issued a detailed operating framework confirming that only companies incorporated in India and listed on a recognised domestic stock exchange may issue or transfer permissible securities for the purpose of a depository receipt issue, and companies undertaking a domestic IPO can even set up a simultaneous GDR programme. SEBI also mandates minimum pricing linked to the domestic issue price and lays out voting-rights arrangements between the overseas depository and the underlying shareholders.

Why companies choose the GDR route 🔗

Raising capital domestically has limits, especially for large companies planning global expansion. GDRs address several of these limits at once.

Diversifying the investor base 🔗

A company that depends entirely on domestic institutional and retail investors is vulnerable to swings in the local market. GDRs bring in foreign institutional investors, pension funds, and sovereign wealth funds who might otherwise never buy an Indian company’s shares because of unfamiliarity with local trading systems.

Building global visibility 🔗

A listing on the London or Luxembourg exchange puts a company’s name in front of an international analyst and investor community. This recognition often supports future overseas ventures, joint partnerships, and even trade negotiations, since the company is now seen as a globally benchmarked entity rather than a purely domestic player.

Improving liquidity and access to capital 🔗

Since GDRs are freely tradable on the foreign exchange where they are listed, they add a layer of liquidity that domestic shares alone may not offer. This also gives the company an additional route to raise large sums of capital that a purely domestic issue might struggle to absorb.

A lighter compliance path than ADRs 🔗

Companies that want foreign capital but wish to avoid the heavy disclosure requirements of the US market often prefer GDRs over ADRs. As one industry explainer puts it, most companies favour the GDR route because it lets them attract foreign investment without investors navigating complex cross-border regulations, currency conversions, or tax issues tied to a full US listing.

How the issuance process actually works 🔗

Issuing a GDR involves several coordinated steps rather than a single transaction:

• Board and shareholder approval: The company’s board proposes the issue, followed by a special resolution passed by shareholders.
• Appointment of intermediaries: A merchant banker, an overseas depository bank, and a domestic custodian bank are appointed to manage the transaction.
• Regulatory filings: The company files the offer document with SEBI and the relevant stock exchanges, and seeks in-principle approval from the exchange where the GDRs will be listed.
• Deposit of underlying shares: Shares are transferred to the domestic custodian, which confirms receipt before the overseas depository issues GDRs against them.
• Listing and trading: Once listed on the foreign exchange, the GDRs begin trading, and holders may later convert them into the underlying domestic shares following the prescribed procedure.

Risks that come with the GDR route 🔗

GDRs are not risk-free for either the company or its existing shareholders. Currency fluctuations affect the value investors receive, since the underlying shares are rupee-denominated while the receipts trade in a foreign currency. There is also a governance concern that regulators have flagged directly: a study on Indian securities enforcement found instances where companies raised loans from foreign banks against GDR holdings rather than receiving genuine sale proceeds, leading to losses for domestic investors when those loans defaulted and the pledged shares were sold. This is one reason SEBI tightened its 2019 framework, adding stricter due diligence on the identity of GDR holders and the source of funds.

The GIFT City development 🔗

India’s GDR framework has continued to evolve. The government has widened where GDRs can be listed by allowing companies to list them at the International Financial Services Centre in Gujarat’s GIFT City, giving Indian companies a domestic-yet-international venue to raise foreign capital, alongside the traditional European exchanges. This move is aimed at giving companies more flexibility and reducing dependence on distant foreign jurisdictions for the same regulatory benefits.

Bringing it together 🔗

A GDR is essentially a bridge: it lets an Indian company’s shares travel to a foreign exchange in the form of a tradable certificate, without the company itself listing abroad. Section 2(44) of the Companies Act gives this bridge its legal foundation, the GDR Rules and the RBI’s Depository Receipts Scheme regulate how it is built, and SEBI ensures the traffic on it stays transparent. For a company weighing its capital-raising options, a GDR issue can mean broader investor access and global standing, but it also demands careful compliance and honest disclosure to avoid becoming a case study in misuse rather than growth.

What do you think? If you were advising a mid-sized Indian company on raising its first round of foreign capital, would you recommend a GDR listing on a European exchange or the newer GIFT City route, and what factors would tip that decision?

References

1. https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf
2. https://www.kotakneo.com/investing-guide/articles/adr-vs-gdr/
3. https://www.sebi.gov.in/sebi_data/attachdocs/apr-2017/1492004818999.pdf
4. http://dea.gov.in/schemes-services/depository-receipts-scheme-2014
5. https://corporate.cyrilamarchandblogs.com/2019/10/sebi-introduces-framework-for-issuance-of-depository-receipts/
6. https://cleartax.in/s/global-depository-receipt-gdr
7. https://jrtdd.com/index.php/journal/article/download/1087/750/1209
8. https://www.business-standard.com/article/pti-stories/govt-allows-cos-to-list-global-depository-receipts-at-ifsc-120021600272_1.html