GDR vs FCCB: Difference and Comparison

GDRs (Global Depositary Receipts) represent shares of a foreign company traded on international markets, enabling global investment. FCCBs (Foreign Currency Convertible Bonds) are debt instruments issued by foreign companies, convertible into equity shares, offering potential upside through conversion and fixed income through bond features. GDRs offer direct equity ownership, while FCCBs provide a hybrid of debt and equity exposure with potential dilution upon conversion.

Key Takeaways

1. Global Depository Receipts (GDRs) are certificates issued by banks representing foreign company shares, allowing investors to trade these shares in multiple markets.
2. 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.
3. 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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Comparison Table

Feature	GDR (Global Depository Receipt)	FCCB (Foreign Currency Convertible Bond)
Purpose	Raise capital from international investors	Raise foreign currency from foreign investors
Underlying Asset	Shares of a company listed on a domestic stock exchange	Debt instrument issued by a company, convertible into shares at a predetermined price and time
Trading Location	Listed and traded on a stock exchange outside the issuer’s home country	Primarily traded over-the-counter (OTC) market
Regulation	Subject to regulations of the issuing company’s home country and the listing exchange	Subject to regulations of the issuing company’s home country and specific regulations for FCCBs
Investor benefits	Access to foreign companies, diversification, potentially higher returns	Exposure to a specific company in a preferred currency, potential for capital appreciation through conversion
Issuer benefits	Access to foreign capital, improved liquidity, potential for higher valuation	Raise funds in a foreign currency, potentially lower interest rates compared to domestic borrowings
Risks for Investors	Currency fluctuations, political and economic risks in the issuer’s country, potential for illiquidity	Credit risk of the issuer, potential for dilution upon conversion, risk of not converting if the stock price doesn’t reach the conversion price
Risks for Issuers	Currency fluctuations, potential for loss of control if GDRs hold a significant portion of voting rights	Debt obligation, potential for currency depreciation increasing repayment costs

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What is GDR?

Introduction to GDRs

Global Depositary Receipts (GDRs) are financial instruments that represent ownership of shares in a foreign company. They facilitate investment in foreign companies by enabling them to be traded on international stock exchanges. GDRs are typically denominated in a currency other than that of the company’s home country, making them accessible to investors worldwide.

Structure and Mechanism

GDRs are created when a foreign company deposits its shares with a depositary bank, typically in a country with a robust financial market such as the United States or the United Kingdom. The depositary bank then issues GDRs, each representing a specific number of underlying shares of the foreign company. These GDRs are then traded on international stock exchanges like any other security, allowing investors to buy and sell them freely.

Benefits and Advantages

GDRs offer several benefits to both issuers and investors. For issuers, GDRs provide access to a broader investor base and increased liquidity by tapping into international capital markets. This can help foreign companies raise capital more efficiently and at potentially lower costs compared to domestic markets. Additionally, GDRs enhance visibility and credibility for the issuing company on a global scale.

For investors, GDRs offer the opportunity to diversify their portfolios by gaining exposure to foreign markets and companies. They also provide a convenient way to invest in foreign companies without the need to navigate complex foreign exchange processes or regulatory requirements. Furthermore, GDRs often come with investor protections and corporate governance standards, providing a level of assurance to investors.

 

What is FCCB?

Introduction to FCCBs

Foreign Currency Convertible Bonds (FCCBs) are financial instruments issued by companies in a currency different from their home currency, typically in the form of bonds. These bonds offer investors the option to convert them into equity shares of the issuing company at a predetermined conversion price during or at the end of the bond’s maturity period. FCCBs provide companies with an alternative means of raising capital while offering investors the potential for capital appreciation through equity conversion.

Structure and Mechanism

FCCBs are structured as bonds with a fixed maturity date, typically ranging from five to seven years. They carry a coupon rate, which is the interest paid to bondholders at regular intervals until maturity. One of the key features of FCCBs is their convertibility option, allowing bondholders to convert the bonds into a predetermined number of equity shares of the issuing company.

The conversion price, set at the time of issuance, determines the rate at which FCCBs can be converted into equity shares. This price is usually set at a premium to the prevailing market price of the company’s shares at the time of issuance. If the market price of the company’s shares rises above the conversion price, bondholders may choose to convert their bonds into equity, potentially realizing capital gains.

Benefits and Advantages

FCCBs offer several benefits to both issuers and investors. For companies, FCCBs provide access to capital from international markets, often at lower interest rates compared to domestic debt instruments. Additionally, the convertibility feature of FCCBs can act as a hedge against currency risk, as the bonds are denominated in a foreign currency.

For investors, FCCBs offer the potential for capital appreciation through equity conversion, providing an opportunity to participate in the growth of the issuing company. Furthermore, FCCBs offer diversification benefits, as they allow investors to gain exposure to foreign companies and currencies. Additionally, bondholders receive fixed interest payments throughout the bond’s tenure, providing a source of income.

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Main Differences Between GDR and FCCB

2. Here are the main differences between GDRs (Global Depositary Receipts) and FCCBs (Foreign Currency Convertible Bonds) in a bullet-point list:
3. Nature of Instrument:
   • GDRs represent ownership of shares in a foreign company and are traded on international stock exchanges.
   • FCCBs are debt instruments issued by companies in a foreign currency, offering the option to convert into equity shares of the issuing company.
4. Conversion Mechanism:
   • GDRs do not have a conversion feature; they represent direct equity ownership and do not involve conversion into shares.
   • FCCBs come with a conversion option, allowing bondholders to convert their bonds into a predetermined number of equity shares of the issuing company.
5. Interest vs. Dividends:
   • GDR holders typically receive dividends if the issuing company distributes them to its shareholders.
   • FCCB holders receive fixed interest payments throughout the bond’s tenure, regardless of the issuing company’s dividend policy.
6. Risk and Return Profile:
   • GDRs offer potential returns through capital appreciation of the underlying shares and dividends but carry market risk associated with equity investments.
   • FCCBs offer fixed income through interest payments and the potential for capital appreciation through equity conversion, with risks including credit risk and currency risk.
7. Regulatory Framework:
   • GDRs are subject to the regulatory framework of the countries where they are listed and traded, as well as the regulations governing cross-border securities transactions.
   • FCCBs are subject to regulatory requirements related to bond issuance and conversion, as well as foreign exchange regulations governing cross-border capital flows.
8. Liquidity and Trading:
   • GDRs are traded on international stock exchanges, providing liquidity to investors through active trading markets.
   • FCCBs may have less liquidity compared to GDRs as they are traded over-the-counter or on specific bond markets, which may limit trading opportunities.
9. Purpose and Use:
   • GDRs are primarily used by foreign companies to access international capital markets and by investors to gain exposure to foreign companies and markets.
   • FCCBs are used by companies to raise capital from international investors while offering investors the potential for equity participation and fixed income.

References

1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1751461
2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=928396