Surprising number of smaller companies have outstanding depository receipts

The finance minister recently announced a liberalisation of depository receipts, an instrument which can be used by Indian companies to raise capital abroad

The majority of listed firms with outstanding depository receipts belong to the small- and mid-cap segments.

There are 68 listed companies with outstanding depository receipts. A total of 44 are from the small and mid-cap segments. These include 35 small-cap companies.

A depository receipt is an instrument which can be used by Indian companies to raise capital abroad. The Finance Minister recently announced a liberalisation of this route.

Mehul Savla — Director at boutique investment bank RippleWave Equity — said that smaller companies often used the route to access pools of foreign capital which weren’t available domestically.

“Two decades ago, there weren’t (as) many foreign investors who were sure about directly investing into India,” he said. Foreign investors who invested in India may also have had a tendency to largely stuck to bigger companies with higher liquidity. This was less the case in their home markets. 

The Securities and Exchange Board of India had expressed reservations about the use of the route. It had earlier passed a number of orders on companies, which had raised capital through the instruments. They were found to have misled investors through a network of related parties to show the raising of large amounts of foreign capital and later unloaded the shares on domestic investors.

The shares underlying depository receipts account for over 25 per cent of the total shareholding in the case of at least three companies as of June 2019, shows an analysis of data on companies with outstanding depository receipts from corporate tracker nseinfobase.com. Each had a market capitalisation of under Rs 2,000 crore. They account for more than ten per cent of share capital in the case of a dozen firms. 

To be sure, some of the firms are larger companies which have seen a decline in the share price. The stock market regulator in a recent report also suggested that there may be advantages to the use of the route if properly regulated.

“Listings on foreign stock exchanges can also increase analyst coverage for the listed shares and facilitate clearer comparisons against other peer companies that are listed overseas, each of which contribute toward more accurate benchmarking and valuations,” said a December 2018 Sebi report on liberalising the route.

The report had suggested the use of depository receipts to be permitted in well-governed jurisdictions. Indian laws such as the Companies Act would continue to apply to these companies, according to the suggestions in the report. The ten jurisdictions permitted are largely developed ones including the United States of America and the United Kingdom.