Global depositary receipts are certificates held in depository banks used to purchase shares of foreign companies; these receipts represent the number of shares owned in a particular company. Depositary banks are international institutions whose purpose is to distribute and manage global depositary receipts. The shares are typically traded as domestic shares, but are available for purchase globally. Corporations usually issue these kinds of depositary receipts to attract foreign investors. Global depositary receipts often are listed on various international stock exchanges, such as the London Stock Exchange, the Luxembourg Stock Exchange and the Frankfurt Stock Exchange.
When banks distribute global depositary receipts to the issuing corporation, they draw out deposit agreements. Provisions of these agreements include factors such as setting record dates and depositing the issuer's shares in the custodian bank. The agreement usually outlines instructions for the completion and delivery, or the exchange and release, of the global depositary receipt shares as well.
When investors want to make a global depositary receipt purchase, there are several steps to complete. First, they instruct their broker to purchase receipts for a specific company; the broker can complete the order by either purchasing the receipts on specific exchanges or by acquiring standard association shares in the home market of the company by using a broker in the issuer's country. Once this is completed, the foreign broker gives the shares to the bank in the country where the issuing corporation is located.
After these steps are completed, the investor's broker lets the bank know about the purchased shares in the issuer's market; the shares are then given to the custodian bank and deposited in the investor's account. The custodian notifies the depositary bank that the shares have been credited to the depository bank's account, which allows the broker to debit the investor's account for the global depositary receipt issuance fee.
Investors who are not satisfied with their global depositary receipts and choose to sell them can do so through their brokers. The broker has the choice of either selling the shares on the exchanges where trades occur on global depositary receipts, or withdrawing and converted them into ordinary shares of the company. If the broker chooses to sell the shares on the exchange, he must seek the services of a broker in the distributor's market. If the broker chooses to cancel the shares, however, they return to the depositary bank and are delivered to the issuing company, which then credits the investor's account for the market value of the shares.
A global depositary receipt may equal many shares in a company or fractions of shares. The receipt's value is based on the market price of the shares. If the receipt is valued higher than a single stock, it would represent ownership of multiple stocks, for example. The receipts typically are priced to be competitive with market stock values.
