From UPSC perspective, the following things are important :
Prelims level : Global Depository Receipts (GDRs)
Mains level : Not Much
Central Idea: Tata Consumer Products has announced its decision to delist its global depository receipts (GDRs) from the London Stock Exchange and Luxembourg Stock Exchange.
What are GDRs?
- GDRs are financial instruments used by companies to raise capital from international investors.
- They represent a bundle of shares in the company and are typically listed and traded on international stock exchanges.
- GDRs provide a way for companies to access global capital markets and attract investments from foreign investors without directly listing their shares on multiple stock exchanges around the world.
GDR Regulation in India
- In India, GDRs can be issued by Indian companies that meet the eligibility criteria set by the SEBI.
- SEBI sets guidelines and regulations for companies wishing to issue GDRs typically include the following:
- Listing: The company must be listed on a recognized stock exchange in India.
- Track Record: The company should have a track record of profitability for a certain period as specified by SEBI.
- Good Corporate Governance: The company must comply with corporate governance norms and disclose relevant financial and non-financial information.
- Regulatory Compliance: The company must comply with all applicable laws and regulations, including those related to securities and foreign exchange.
- Approval from Regulatory Authorities: The company needs to obtain necessary approvals from SEBI and other relevant authorities for the issuance of GDRs.
Need for GDR
- Capital Raising: GDRs offer a means for companies to raise capital from international investors, helping them finance investments, expansion projects, acquisitions, or debt repayment.
- Global Investor Base: GDRs allow companies to access a diverse range of international investors, including institutional investors, hedge funds, and retail investors, thereby expanding their shareholder base.
- Cost Efficiency: GDRs can be a cost-effective alternative to traditional methods of listing shares on multiple exchanges, as they enable companies to tap into global capital markets without the need for separate listings in different countries.
- Simplified Trading and Settlement: GDRs facilitate easy trading and settlement for international investors, as they eliminate the need to navigate local market regulations and procedures.
- Risk Mitigation: GDRs can provide a degree of risk mitigation for companies by reducing their exposure to local market fluctuations and volatility, as they offer access to a more diversified investor base.
- Arbitrage Opportunities: GDRs can create arbitrage opportunities for investors who can exploit price discrepancies between the GDRs and the underlying shares listed on the domestic stock exchange.
- Access to Global Capital: GDRs enable Indian companies to access a larger pool of international capital and diversify their funding sources beyond domestic markets.
- Increased Liquidity: Listing GDRs on international exchanges provides Indian companies with broader exposure and enhances the liquidity of their shares, as they become accessible to a wider range of investors.
- Enhanced Global Visibility: GDRs help raise the profile of Indian companies on a global scale, increasing their visibility and attracting the attention of international investors and analysts.
- Currency Diversification: GDRs can also provide an opportunity for Indian companies to diversify their exposure to foreign currencies, as GDRs are often denominated in a currency other than the company’s home currency.
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