Finds cases where these rights are vested with the company.
The Securities and Exchange Board of India (Sebi) wants to further tighten rules related to voting rights of holders of depository receipts (DRs), especially in cases these rights rest with the board of directors of the company.
It is believed that Sebi is not comfortable with the practice and will take up the issue with the Reserve Bank of India (RBI) and the Ministry of Finance. The issue was discussed at Sebi’s board meeting last week.
Sebi says there are cases where voting rights rest with the board of directors and not DR holders. This is done by structuring the contract in a way that voting rights of DR holders are curtailed.
“It is for consideration whether, as a matter of good governance, it is advisable to restrict issuers from including as ‘terms of issue’ clauses that curtail voting rights of DR holders and which empower the management to exercise voting rights on DRs,” says the Sebi board’s agenda paper available on its website.
“The provisions related to issue of ADRs/GDRs and matters incidental thereto are within the administrative control of the Ministry of Finance/RBI. Therefore, any such requirement may need to be implemented through appropriate policy instructions by the government,” it adds.
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The regulator is looking into whether American depository receipt (ADR) or global depository receipt (GDR) documents can have clauses restraining their holders from exercising voting rights on the underlying shares. Further, if voting rights vest with the management, whether it amounts to acquisition of voting rights by persons in control in terms of the Takeover Regulations. In other words, will an open offer be triggered if voting rights go beyond the open-offer threshold?
ADRs or GDRs are securities listed on overseas stock exchanges representing shares of Indian companies. Depository receipts allow investors to hold shares of companies that are listed in other countries.
The regulator said in some cases, the right to give instructions to custodian bank to exercise voting rights was vested with the board of directors of the issuer company. Suzlon Energy, Federal Bank, K S Oils and Webel-SL Energy Systems are such instances. In case of Tata Motors, the management gets voting rights if DR holders fail to instruct the custodian bank.
“In certain other cases, the right is vested with DR holders. Sometimes, a combination of the above is used; the right to instruct is first provided to holders of DRs and in the event of their failure to exercise the said right, it is deemed to have been vested with the board of directors of the issuer company. It is also noted that invariably it is stated that the depository will not exercise any voting rights in respect of the underlying shares, unless required to do so by law,” it explains.
The issue was taken up by Sebi last year at a time when negotiations between Bharti and MTN for a merger were in full swing. The regulator had clarified that if ADR/GDR holders were entitled to exercise voting rights, the “open offer obligations would be triggered on crossing the threshold limits”. Accordingly, necessary amendments to the Takeover Regulations were notified on November 6, 2009.