In Today’s world, investment opportunities are not geographically confined. Most investors are fascinated by the reports of unfolding economies and flourishing growth in several nations worldwide and wish to participate when it comes to investing in several of them.
Excessive inflation and changes in the exchange rates can also ruin the investor’s investment. If investors are ready to face both the benefits and risks of investing globally, there are many ways in which they can introduce themselves to the foreign market.
- Global Depository Receipts (GDRs) are certificates issued by banks representing foreign company shares, allowing investors to trade these shares in multiple markets.
- Foreign Currency Convertible Bonds (FCCBs) are debt securities that can be converted into a predetermined number of shares in the issuing company or redeemed for cash.
- GDRs offer equity exposure, while FCCBs offer debt and equity exposure with the potential for capital gains through conversion.
GDR vs FCCB
The difference between GDR and FCCB is that GDR is an equity instrument in the form of Depository Receipts created by the Overseas Depository Bank outside the domestic country and issued to foreign investors. Whereas FCCBs are convertible debt instruments that help companies raise funds in foreign countries by issuing currencies different from the issuer’s home country.
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|Parameter of Comparison||GDR||FCCB|
|Meaning||Global Depository Receipt is an instrument issued by a depository bank outside the domestic country as a depository receipt or certificate.||Foreign Currency Convertible Bonds is a bond provided by an Indian company in foreign currency which can be convertible into equity shares or depository receipts.|
|Debt/equity capital||GDR is an equity capital representing the shareholders’ funds.||Under these FCCBs, the investors have an alternative to changing the bonds into equity or depository receipts since it is a quasi-debt instrument. If the investors choose to hold the bonds as it is rather than changing them, the company can guarantee the payments to the bondholders.|
|Mode of treatment||GDR is reckoned to be a Foreign Direct Investment.||FCCB is reckoned to be an External Commercial Borrowing.|
|Tax on dividends/interest||The depository banks pay GDR holders a dividend. The GDR holders are not accountable for paying any tax on such dividends.||FCCB holders are paid interest by Indian companies. The FCCB holders are liable to pay tax to the such interest given by firms.|
|Dilution||Under GDR, immediate dilution takes place.||It saves the risk of equity dilution since it would take place only when FCCBs convert their debt into equity.|
What is GDR?
A Global Depository Receipt (GDR) is a general name given to a negotiable instrument (which consists of one or more additional shares and convertible bonds) issued abroad by a domestic company, with the help of an Overseas Depository Bank, to residents/investors outside the domestic territory to raise funds in the home country. Both companies issue the shares only after agreeing with the law.
Features of GDR:
- Since Global Depository Receipts are exchange-traded instruments for numerous countries, they can trade on diverse stock exchanges simultaneously.
- Depending on the investors, GDR certificates can consist of multiple shares differing from a mere decimal to a large integer. A GDR, in general, can contain up to only ten shares.
- GDR’s price is constructed on the cost of the securities, a tad bit higher regarding negotiation costs, and so on, so that the negotiator/middleman/broker can make a profit and the demand and supply in the stock market.
- When investors purchase shares in the form of GDRs from foreign companies, they are not required to pay any tax. Hence, GDR saves the taxes of an investor.
- GDRs give widespread companies entrance to overseas investments through a comparatively uncomplicated method and also help companies increase their perceptibility by issuing GDRs in several countries.
- Non-resident investors find trading very simple since Global Depository Receipts can easily be transferred from one person to another without needing heavy documentation like other securities.
- Global Depository receipts are invested worldwide, and these investors are liable to follow the guidelines of several commercial managers. It is necessary to follow these guidelines for a tiny error that could lead to severe consequences.
- Global Depository Receipts are exposed to the risk of variations in the foreign exchange rate. Inflation in the value of overseas money can result in a loss to the holder of these shares.
- Since small investors might not be able to gain the benefits of lower transaction costs by issuing multiple shares in each Depository Receipt, in this situation, it’s beneficial to High Net-Worth Individual (HNI) investors since they can invest massive amounts and issue multiple shares in GDR.
What is FCCB?
FCCB (foreign currency convertible bonds) is a bond provided to the bondholders by companies in currencies non-identical to their own. These bonds are convertible into equity shares immediately upon issue or maturity by the investors.
Main features of FCCB:
- FCCB makes principal payments till a specific period after which, like any different form of a bond, these bonds to are converted into equity.
- Another essential feature of FCCB’s convertible bonds is that provides the holder with the right to convert FCCB to a depository receipt or equity after a given time.
- FCCBs are particular types of bonds that can be exchanged in the stock market.
- FCCB’s leading guide/instruct the new markets to buy or sell bonds in the stock market which successively results in companies earning a large amount of money outside the home country.
- If the conversion of bonds into equity and depository receipts doesn’t benefit the bondholders, they enjoy the benefit of guaranteed payments on these bonds.
- The company’s dilution is considered to be lower since the conversion of FCCBs into equity happens at a price that is already determined when the company issues these bonds to the investors, which are usually at a premium.
- If the company is not doing well in the market and stock prices depreciate, the bondholders may not convert the bond into equity. In such a troubled position, the company could face the burden of paying interest and principal repayments to the bondholders. Hence, they are solely suitable in a bull market, not a bear market.
- Since FCCBs are quasi-debt instruments, sometimes the bonds remain as debt and do not get converted into equity or a depository receipt. This appears on the liabilities side of the company’s balance sheet and is shown as debt until conversion.
- A fall in the value of the rupee against a foreign currency can make the interest and principal repayments costly, which may be a considerable expense for the companies.
Main Differences Between GDR and FCCB
- GDR is an instrument where an overseas depository bank issues equity shares to the residents of another country. FCCB is an instrument presented to investors by enterprises in the currencies of different countries globally.
- GDR is an equity instrument that represents the funds of the shareholders. FCCB is a debt instrument where the bondholders can convert the bonds into shares or depository receipts. If the conversion is not beneficial, the bondholders can get secured payments from the bonds.
- GDR is also known as Foreign Direct Investments (FDI), that is, an investment made by a company in one country to a company in another country as a form of controlling ownership and FCCB’s are also known as External Commercial Borrowing (ECB), that is, an instrument used to raise money in foreign currency outside the country.
- The GDR holders need not pay any tax on the dividends paid by the overseas depository banks. The FCCB holders are accountable to pay tax on the interest paid by companies.
- GDR amounts to an immediate dilution. Dilution under FCCB’s are considered lower because dilution only takes place when the debt is converted into equity.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.