The present scheme governing the issue of Depository Receipts (DRs) was designed in 1993 through RBI’s Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993. This was a time when India’s capital market was substantially closed to foreign market. In addition, the domestic financial system was fairly weak at the time. With globalization and liberalization at its helm, the Finance Ministry has notified a liberalized Depository Receipts Scheme, 20141 on 21st October, 2014 that includes issue of DRs against all type of securities, as against equity shares presently. The revised scheme also allows unlisted companies to raise funds from outside India through issue of DRs. The new scheme is in line with the report made by the M. S. Sahoo Committee and shall be effective from 15th December 2015.

As per the new scheme notified by Ministry of Finance, ‘Depository Receipt’ is defined as:

Depository receipt means a foreign currency denominated instrument, whether listed on an International Exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in section 2(44) of the Companies Act, 2013.

‘Global Depository Receipts’ have been defined by the Companies Act, 2013 as ‘any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorised by a company making an issue of such depository receipts’.

‘Permissible securities’ as used in the above definition has been defined to mean ‘securities’ as defined under section 2(h) of the Securities Contracts (Regulation) Act, 1956 (‘SCRA Act’) and include similar instruments issued by private companies which are in dematerialised form and can be acquired by persons under the FEMA Regulations.

In light of the above, DRs can be backed by ‘Securities’ which carry a wider meaning as against the current provision of equity only, giving way to companies to issue bonds overseas as the underlying security for issue of DRs.

Highlights of the Scheme:

  • The New scheme would replace the issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993. However, those related to foreign currency convertible bonds would continue to apply.
  • Under the New Scheme, any Indian company whether listed or unlisted, private or public or any other issuer of permissible securities or any person holding permissible securities will be allowed to issue or transfer permissible securities to a foreign depository for the purpose of issue of DRs.
  • Further, Unsponsored DRs (i.e. depository receipts issued without specific approval of the issuer of the underlying permissible securities) can be issued on the back of listed permissible securities on the condition that the DRs “give the holder the right to issue voting instructions and are listed on an international exchange”.

Till now Indian companies could have issue both, American Depository Receipts as well as Global Depository Receipts to foreign investors but the underlying value of these DRs could have been accessed only through equity or bonds convertible into equity. Unsponsored Depository Receipts were not permitted either.

  • The foreign depositories may issue DRs either through public offering or private placement or in any other manner as prevalent in a permissible jurisdiction. Holder of the permissible securities can transfer them to a foreign depository with or without the issuer’s approval. Such transfers will be permissible through transaction on a Stock Exchange, bilateral transactions or by tendering through a public platform
  • Aggregate of permissible securities issued or transferred to foreign depository will be counted as a part of foreign investment limit for a particular sector to which the concerned company belongs.
  • Price of permissible securities issued to foreign depository for the purpose of issuing depository receipts shall not be less than price if such security issued to domestic investors.

For example: ABC Limited, a listed company makes a Qualified Institution Placement of shares and the Floor price comes at Rs 70 per share after complying with pricing norms of ICDR Regulations. Now, if same class of shares is being issued to foreign depository for the purpose of issuing DRs, price cannot be less than Rs. 70 and minimum price regulation of ICDR shall be complied with.

  • The regulations also allow the foreign depository to exercise voting rights associated with the permissible securities issued, irrespective of whether any voting instruction has been issued by the holder of the DRs.
  • If the underlying shares of DRs confer upon its holders the right to issue voting instructions and these DRs are are traded on an international exchange, then these shares will be counted as part of public shareholding of the company.
  • Any approval necessary for issue or transfer of permissible securities to a person resident outside India shall apply to the issue or transfer of such permissible securities to a foreign depository for the purpose of issue of DRs. Subject to the approval required issue or transfer of permissible securities / DRs, the issue of depository receipts shall not require any approval from any government agency if the issuance is in accordance with the Scheme.

It has been clarified that if the issue of permissible securities does not require approval under the FEMA Act, no approval will be required for issue of such DRs as well.

Impact on FDI / ECB Regulations

The FDI Policy covers foreign investment in equity shares of an Indian company or fully and mandatorily convertible preference shares or debentures into equity. ECBs, on the other hand, covers flow of foreign capital into India through contribution in debt instruments.

Depository Receipts, including ADRs and GDRs, issued as per the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 and RBI’s FDI Policy refers to issue if DRs with equity shares as the underlying security. Accordingly the issue of these DRs to person resident outside India was covered by the FDI Policy.

On the other hand FCCBs are foreign currency denominated bonds issued to non-resident entity which are convertible into equity shares of the issuing company in any manner, either in whole, or in part. Since FCCBs are not fully and compulsorily convertible into equity, they were brought under the ECB guidelines in August 2005 and are required to comply with the ECB guidelines framed by the RBI.

With the revision in the depository receipts regime, DRs can now be issued for any underlying ‘permissible security’, which covers the definition of ‘security’ under the SEBI’s  SCRA Act. In light of the wider coverage of issue of DRs, not only equity, but any kind of  ‘security’ including bonds, whether convertible or not, may be issued to foreign depository.

In view of the above development, a very pertinent question is whether issue of such DRs with underlying security being debt capital as well, comply with FDI or ECB regulations. Since FDI pertains to only equity or instruments compulsorily convertible into equity, will the DRs with non-convertible debentures as underlying security comply with ECB or continue to be covered by FDI?

In the absence of any clarity in this regard, one cannot presume to take the FDI / ECB guidelines to be automatically amended. Further, Para 9 of the revised DR framework, provides that approvals as necessary for issue and transfer of the underlying security to a person resident outside India would be also apply to issue and transfer of the underlying security to a depository as well. This means that the approvals, as required under the FDI / ECB regulations for respective securities covered by these regulations will also be applicable to the issue of DRs with such underlying securities as well.

However, other than requisite approvals under FEMA, there is lack of clarity as to the applicability of the other provisions to the issue of DRs in light of the revised DR framework.

(Author Shampita Das & Aman Nijhawan are associated with Vinod Kothari & Company and can be reached at  [email protected]  & [email protected])

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March 2021