Thursday, January 8, 2015


 What are  Global Depository Receipts (GDRs)? Recently GDR was in news related to black money in India. Examine the issue. 

GDRs are financial instruments used by domestic companies to raise funds from abroad. Recently SEBI has highlighted that through GDR black money is being routed in India . They argue that such GDRs are used for round tripping activities and are often not backed by real investors.
The likely modus operandi is as follows- investor A in India invests in an institution in one of the tax haven nations. The domestic company issues funds by issuing GDR to the same institution. However, by the time, the money reaches the domestic company, it has changed hands several times and therefore is detect its source. SEBI's report has shown links between investor A and the company raising GDR.
GDRs are an important source of funds for domestic companies. They have gained importance as the domestic sources of funding are few and costly. Rates of interest in India have been very high. Banks are reeling under high NPAs and therefore, are exercising caution in lending to private sector. In such a scenario, they have no choice but to raise funds from abroad using instruments like GDR.
Given the importance of GDR in fueling domestic growth, SEBI needs to strike a balance between curbing sources of black money and at the same time ensuring that licit financial flows are unaffected. Various approaches include- strengthening international cooperation, specific targetting of financial instruments like participatory notes which are used for routing black money

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