Financial Instruments GDRs & P-Notes

Nilotpal Das

Global Depositary Receipt GDR

What Does Global Depositary Receipt GDR Mean? 1. A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. 2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros. Among the Indian Companies Reliance Industries

 Global Depository Receipts facilitate trade of

shares, and are commonly used to invest in companies from developing or emerging markets. Prices of Global Depositary Receipt are often close to values of related shares, but they are traded and settled independently of the underlying share. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York. GDRs are often listed in the Frankfurt Stock Exchange, Luxembourg Stock Exchange and in the London Stock Exchange, where they are traded on the International Order Book (IOB). Normally 1 GDR = 10 Shares, but not always. It is negotiable instrument which is denominated in some freely convertible currency.

Development of GDRs
Global Depository Receipts (sometimes spelled "Global

Depositary Receipts"), or simply GDRs, were developed on the basis of American depositary receipts (ADRs), to securitize the ownership in shares. GDRs are, in simple terms, securities that represent an underlying foreign share. Global Depository Receipts are traded instead of the original shares on exchanges worldwide. The benefit is that, once the Global Depository Receipt is established, it can then be traded on any stock exchange in the world.
Global Depository Receipts have come into prominence

recently as being one of the favored instruments to go public on the Frankfurt Stock Exchange and other exchanges. They are not complicated to understand and they trade just like a direct stock listing. Investors shall not likely even know the difference.

History of GDR
Global Depository Receipts have a long and respected

history. The history of Global Depository Receipts began in the late 1920s when Selfridges, the London department store, decided to expand its investor population in the US. A US bank, Guaranty Trust, solved the problem by holding the Selfridges shares in London in its own name, which was recorded on the UK register, and then issuing promissory notes representing those shares in New York. Being both denominated in US dollars and issued against a US legal contract with investors, the promissory notes traded as US securities in New York and worked in exactly the same manner as other US securities. Ownership of the promissory notes was recorded in a US-held register.
Thus, Global Depository Receipts have worked

successfully for decades to encourage investment between one country and another.

Participatory Notes
What Does Participatory Notes Mean? Financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy Indiabased securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Also referred to as "P-Notes"

 Participatory notes are instruments that derive

their value from an underlying financial instrument such as an equity share and, hence, the word, 'derivative instruments'. SEBI permitted FIIs to register and participate in the Indian stock market in 1992.

Modus Operandi
The investors, who buy these notes, deposit their funds in the US or European operations of the FII, which also operates in India. The FII then buys stocks in the domestic market on behalf of these investors on their proprietary account. In this case, the FII or the broker acts like an exchange: it executes the trade and uses its internal accounts to settle the trade. This h e l p s keeping the investors name anonymous. That is why capital market regulators dislike P-notes. Other similar instruments include equitylinked notes, capped return note, participatory return notes and investment notes.

Features of P Notes
Anonymity: Any entity investing in participatory notes

is not required to register with SEBI (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get registered. It enables large hedge funds to carry out their operations without disclosing their identity. Ease of Trading: Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. Tax Saving: Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries. Money Laundering: PNs are becoming a favourite with a host of Indian money launderers who use them to first take funds out of country through hawala and then get it back using PNs.

Thank You