Now all companies could get to invest in the depository receipts issued by Indian company, even if they are not allowed to invest in India as per the new proposed scheme of depository receipts 2014.
According to officials, it is up to companies to decide the type of investor in their shares and the Indian regulator has nothing to worry as far as the international investors are concerned. “We are allowing the issuance of DRs only in IOSCO and FATF compliant jurisdiction which already have their own securities market regulators. IF the investors are foreign and jurisdiction is foreign, it is up to the individual company and overseas regulator to keep a check on the investor. As far as the scheme is concerned, there is no such bar as it exists now,” said sources close to the developments.
Besides, the new Depository scheme 2014 also proposes to make it an all shares scheme with no debt or quasi debt instruments like Foreign Currency Convertible Bonds (FCCBs). According to the proposal submitted to the ministry, FCCBs will be taken out of the purview of Depository receipts and be treated like debt. This is because these are primarily debt instruments which carry the option to get converted into shares.
The committee set up by the Ministry of Finance under the chairmanship of Dr M S Sahoo, former member Securities and Exchange Board of India (SEBI) has recommended new regime for issuance of foreign currency denominated equity shares by Indian companies overseas.
The proposed new regime – “Depository receipt scheme 2014” will override the existing the scheme of foreign currency denominated instruments – Global depository receipts and foreign Currency denominated bonds etc approved in 1993.
According to sources close to the development, the old regime of 1993 has lost its relevance over the years when foreign investment rules for investments in India and outside were rather restrictive and controlled whereas the current environment favours open policy within the minimum capital controls. Therefore the committee’s mandate was to review the foreign depository receipts (FDRs) in the light of new Companies Act, new financial sector legislations, macro economy, and developments in financial markets and legal clarity in tandem with the more relaxed foreign investment regime in India.
Repealing the old scheme of 1993, the new scheme to be announced has proposed no restrictions for Indian companies to issue DRs. In essence there should be a level playing field for foreign investment into an Indian company- is it foreign investment of shares. However to check the quality of funds , the new scheme proposes to allow companies to issue DRs in those overseas markets which are IOSCO ( International Organisation of Securities Commissions) compliant and fall under the Financial Action task force guidelines for preventive money laundering.
Besides, the DRs in the new scheme will not require any permission as an instrument, albeit indivisual regulators- RBI for foreign investment related norms under FEMA, FDI and FII, SEBI for equity raising forms in overseas market, Income tax etc will have to approve the scheme. However sources said, the DRs as such after the company gets its scheme approved, does not need separate approval from the ministry of finance like now. Thus there will be no separate regulator for DRs as such.
Besides there should not be any pricing restrictions on DRs like debt instruments – external commercial borrowing, says the report according to sources. As far as pricing is concerned, whatever rules apply to the underlying route preferred by the issuer will apply to these foreign currency shares. If the company chooses preferential share allotment, then pricing norms applicable for preferential share will apply to the DRs as well.
Explaining the concept of level playing field, sources said, whatever foreign investment rules apply to a foreign investor to invest in a certain sector and certain company will be applicable to DRs issued by these companies in that sector. Explaining this, sources said, there should not be a disparity between the route chosen by an Indian company to get funds either through foreign investment into that company or by raising funds through shares in the overseas market. A company should not be tied down by procedural hassles in choosing the route to get foreign investment into it and rather the route should be selected purely on commercial reasons.
Currently, while there is no restriction for a company or sector to go for FDI or FII investment within the sectoral cap defined and within the general norms of FII or FDI investment, but the depository receipts (DRs) issued by such a company has to abide by end use restrictions, quantitative restrictions in terms of funds raised or shares allotted, pricing etc. While foreign investment rules means combined limit for FDI and FII investment in a sector or a company falling under that sector, DR is a foreign currency denominated ordinary shares floated by a company for overseas investors with the underlying of the Indian entity .
