Depository receipts: Panel for less curbs on foreign fundraising

Committee recommends issue of DRs by any Indian company on wide ranging securities

Indian companies might soon be allowed to issue depository receipts (DR) abroad on a wide range of securities, with fewer regulatory restrictions. A committee headed by a former wholetime member of the Securities and Exchange Board of India (Sebi) has recommended sweeping changes to the DR regulations. These are aimed at easing foreign capital raising for domestic companies and were made public on Tuesday.

DRs are foreign currency-denominated trading instruments with domestic securities as the underlying product. American depository receipts of Indian companies are popular among Indian users. Unsponsored DRs are issued by depository banks without participation of issuing companies. Companies can issue DRs for non-capital raising purposes such as improving liquidity, valuation or creating visibility of their brand in international markets.

Beside permitting local companies to issue DRs on all kinds of securities such as debt, equity and mutual fund units, the committee has also recommended issue of both sponsored and unsponsored DRs. Under the current regime, domestic issuers are not permitted to issue unsponsored DRs and also DRs with an underlying product other than equity. It has also permitted both listed and unlisted companies to issue these instruments.

“The present DR scheme was introduced when India’s capital markets were substantially closed to foreign capital. In addition, the domestic financial system was fairly weak at that time,” said the committee, which gave its report to the ministry last year.

Market players welcomed the recommendations but also said fund raising abroad by Indian companies under the new route could be some time away. “The introduction of the new scheme for DRs will provide global investors with convenient access to Indian companies, who in turn can attract foreign investment through this flexible and cost-efficient securities product," said Neil Atkinson, Asia-Pacific head of depository receipts at BNY Mellon.

“This might be a measure by the ministry to open up Indian instruments to foreign players who do not want to take currency risks. However, considering that foreign players are investing billion of dollars directly into Indian instruments, it might take considerable time before the DR market could take off,” said Jagannadham Thunuguntla, ·chief strategist, SMC Global Securities.

Another important recommendation by the committee is to categorise DRs with voting rights as 'public shareholding'.

The committee has said that DRs should only be allowed to be issued in jurisdictions which are compliant with rules of the Financial Action Tax Force and the International Organization of Securities Commission.

The committee says the tax treatment of DRs should be similar to that of the underlying securities. "The conversion of a DR into the underlying securities and vice versa should not be taxable events. The trading of DRs outside India should not attract any tax in India," it said.

The committee did not want DRs to be necessarily listed on foreign bourses. However, two members of the seven-member committee dissented, saying DRs issued against listed shares must be listed on an international stock exchange of comparable standards to Indian bourses.   

It said there should be no end-use restrictions on funds raised through the issue of DRs, other than imposed under the Foreign Exchange Management Act (FEMA).