If you say that this is the era of Global Depository Receipts (GDRs) in the Nigerian financial market, you won't be wrong. Banks, in particular, have found a new treasure in GDRs, or so it seems. Recently, Access Bank, GTBank and FCMB have used this security issue window. The Diamond Bank GDR offer is currently open. Union Bank has just obtained shareholders' approval for an intended share offer that includes a GDR tranche. So, this looks certain to continue. However, companies in Indian have used the GDR window more extensively. Over 30 issues were done in 1994 alone. Globally, a lot of GDRs are issued.
While some of the GDR issuing banks in Nigeria have published educational materials to explain the concept and objectives of GDRs, you probably felt more confused, like many average investors, after reading those write-ups.
To help you make investment decisions that are anchored in clearer understanding, this article seeks to break the subject down to simpler terms.
Simply, What a GDR is
GDRs are simply a mechanism to internationally offer and trade equity interest (debt is possible too) in a local publicly-listed company. A GDR is a negotiable certificate issued by the company, representing the equivalent of a certain number of its shares. Those shares, which are held by a custodian bank, provide a backing for the issuance of the GDR which is then sold to international investors. In effect, a purchaser of the GDR has an underlying equity interest in the company, which is represented by shares that have been issued and held in custody. If the proportion, for example, is 100 shares to a GDR, a holder of 150 GDRs has an underlying ownership of 15,000 shares of the company. GDR is therefore a mechanism by which an investor could invest in a foreign company through his local exchange. In most cases, he is entitled to the equity interest rights to vote and to receive any declared dividend, and may have the option to request the cancellation of the GDR to convert it the ordinary shares.
Key Transaction Parties
First, there is the company that initiates the process to offer its equity as GDRs. Then there is a local custodian with whom the shares are deposited for custody on behalf of subscribers of the GDRs. An international depository bank, on the strength of the deposited shares, issues GDRs to be sold to the international market. It also maintains the register of holders of the receipts. The GDRs are listed on an international exchange like the London Stock Exchange but could also be traded over the counter. Some specifics may vary, but, generally, this is the chain that executes the transaction.
Pricing
Two prices are relevant: GDR settlement price at which the offer is sold and the market price of the security thereafter. The latter is determined by normal security trading process, like for any other security, either on the exchange or over the counter. The initial settlement price is determined by the price at which the offer volume is cleared, following a bid process by investors, within a set range of reference prices.
Benefits to Investor
Benefits you gain from investing in GDRs include:
Going GDR
Your easiest opportunity to invest in GDRs may lie in those issued by local companies. The true value of GDRs, though, is in letting you conveniently invest in companies in other jurisdictions. As our investors get more informed and adventurous, they may begin to seek opportunities to invest in companies elsewhere through the instrumentality of GDRs. That's perhaps the real home run.
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