THE GLOBAL DEPOSITORY RECEIPTS (2)
December 2nd, 2007 The Editor || eic@stockmarketnigeria.com
By Tunde Brown
The Global Depository Receipts (GDR)’s price is determined in a somewhat unique way. Due to the fact that it is an instrument with international relevance, there are some other technicalities that differentiate its pricing mechanism from that of the typical local instrument.
In the international market, the price is determined through a process of book building. This involves setting a range of prices within which international investors bid for the GDR. Now, the price at which the offer is subscribed fully based on the bids of the investors becomes the price of the offer – known as settlement price. The settlement price is known only on the day the offer closes.
However, in the local market, a price within the range ruling at the international level is adopted. This tentative price is known as the reference price, which is subject to confirmation on the day the offer closes. Transactions in the local market are made at this price, and if eventually the settlement price falls below the reference price, refunds are made to subscribers for the difference.
Of all the benefits derivable from this sort of investment, the fact that it facilitates portfolio diversification into dollar denominated securities stands out. Investors are allowed to access the international market through this medium.
Global Depository Receipts trade easily and conveniently, and the exposure to Global best practices (for GDR’s publicly traded) with the international regulators is equally a plus.
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