Govt may allow exchanges from the IFSC to issue depository receipts

The government is considering a proposal to allow exchanges from the International Financial Services Centre (IFSC), set up at the Gujarat International Finance Tec-City (GIFT City), to issue depository receipts (DRs). 

Market players have lobbied the government to allow DRs with an omnibus account structure to be listed and traded on IFSC exchanges, said people in the know. 

“Introduction of depository receipts at the IFSC exchanges will be a good way to allow Indian companies to raise dollar-denominated capital and enable capital formation for the Indian economy,” said V Balasubramaniam, managing director & chief executive officer (CEO), India INX. 

DRs are negotiable certificates issued by a bank representing shares in a foreign company traded on a local stock exchange. The depositary receipt gives investors the opportunity to hold shares in the equity of foreign countries and gives them an alternative to trading on an international market.

Issuance of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) has come to a standstill, especially after Sebi increased its oversight, fearing they could be used for money laundering and market manipulation. 

“The problem is that level one depository receipts are tradeable securities on a bearer basis and it is difficult to track the beneficial owner’s (BO’s) information every time the shares change hands unless registered with the issuing depository. This cannot meet the BO level declaration as desired by Sebi,” said Viraj Kulkarni, CEO & founder, PIVOT Management Consulting.  

Globally, DRs function within an omnibus structure that allows a certain amount of anonymity to investors. Transactions within the account are carried out in the name of the broker, protecting the identities of investors in the omnibus account. The broker managing the omnibus account typically has the ability to execute trades on behalf of investors with funds inside the omnibus account. 

“India needs to go beyond the traditional capital raising DR products that it now offers, and bring it on a par with that of its global peers. Enabling the omnibus structure and tax breaks will increase the attractiveness of the segment and the IFSC in the long run. Allowing DRs will also increase the diversity of products at the exchange level,” said Kulkarni. Following the recommendations of the MS Sahoo Committee, the government had in 2014 notified the liberalised DR scheme. 

GDRs used to be a preferred route for many Indian companies earlier but experts said overseas investors had turned averse following irregularities by some small- and mid-sized Indian companies. The markets regulator did not have jurisdiction over GDRs till a Supreme Court judgment in 2015 brought all overseas depository receipts under Sebi’s ambit. Since then, Sebi has cracked down on GDR issuances by several companies for suspicious trading.

Sebi recently barred Sanraa Media and seven entities, including Clifford Capital Partners, for at least five years from the securities market in a matter related to manipulation of a GDR issue, according to reports.

Market participants with plans to kickstart operations at the IFSC are adopting a wait and watch approach ahead of the national elections next year. 

While 50-75 domestic brokerages have shifted to IFSC, foreign brokerages and custodians are yet to set up shop. They are likely to wait it out till the elections before taking a decision, say experts.

A unified regulator specifically for IFSC, announced in this year’s Budget, is also unlikely to see light of the day any time soon.