Global Depository Receipt vs. Participatory Note

Attribute	Global Depository Receipt	Participatory Note
Definition	A financial instrument representing shares of a foreign company held by a bank outside the country where the shares are traded.	A financial instrument used by foreign investors to invest in Indian securities without registering with SEBI.
Regulation	Regulated by the Securities and Exchange Board of India (SEBI).	Regulated by the Reserve Bank of India (RBI).
Underlying Asset	Shares of a foreign company.	Indian securities.
Issuance	Issued by a foreign depository bank.	Issued by foreign institutional investors (FIIs).

Global Depository Receipts (GDRs) and Participatory Notes (PNs) are both financial instruments that allow investors to invest in foreign securities. While they serve a similar purpose, there are key differences between the two that investors should be aware of before deciding which one to invest in.

Regulation and Legal Framework

GDRs are regulated by the Securities and Exchange Board of India (SEBI) and are subject to strict disclosure and reporting requirements. This provides investors with a level of transparency and protection. On the other hand, PNs are not regulated by SEBI and are considered to be more opaque in terms of their underlying assets. This lack of regulation has led to concerns about money laundering and tax evasion through PNs.

Underlying Assets

GDRs represent ownership of shares in a foreign company that are held by a depository bank. This means that investors have direct exposure to the performance of the underlying company. PNs, on the other hand, are derivative instruments that derive their value from an underlying asset, such as shares or debt securities. This indirect exposure can lead to higher levels of risk and volatility for PN investors.

Market Access

GDRs are typically listed on international stock exchanges, such as the London Stock Exchange or the Luxembourg Stock Exchange. This provides investors with easy access to global markets and liquidity. PNs, on the other hand, are traded over-the-counter (OTC) and are not listed on any exchange. This lack of transparency and liquidity can make it difficult for investors to exit their positions quickly.

Tax Implications

Investing in GDRs may have tax implications depending on the country in which the underlying company is based. Investors may be subject to withholding taxes on dividends or capital gains. PNs, on the other hand, are structured in a way that allows investors to bypass certain tax regulations. This has made PNs a popular choice for investors looking to minimize their tax liabilities.

Risk and Return

Both GDRs and PNs carry their own set of risks and potential returns. GDRs provide investors with direct exposure to the performance of a foreign company, which can lead to higher returns if the company performs well. However, this also means that investors bear the full risk of any losses. PNs, on the other hand, offer investors the opportunity to invest in a diversified portfolio of assets, which can help mitigate risk. However, this diversification may also limit potential returns.

Conclusion

When considering whether to invest in GDRs or PNs, investors should carefully weigh the advantages and disadvantages of each option. GDRs offer transparency and direct exposure to foreign companies, but may come with tax implications and market risks. PNs, on the other hand, provide investors with flexibility and potential tax benefits, but may lack transparency and liquidity. Ultimately, the choice between GDRs and PNs will depend on an investor's risk tolerance, investment goals, and regulatory considerations.