ADR/GDR rights under RBI lens

WITHOUT CONTEMPT

The Reserve Bank of India (RBI) has fired the first salvo in regulating activity around voting rights related to global depository receipts (GDRs) and American depository receipts (ADRs). In a circular issued recently, the RBI has directed all banks that have issued GDRs or ADRs to take prior consent of the RBI before amending any agreement between the banks and the depositories that issue such instruments.

Depository receipts are instruments issued by international depositories, and they represent an interest in the underlying shares held by them in the issuer company. The shares are usually held by a domestic custodian on behalf of the depositories and the depositories in turn issue the depository receipts, which entitle the holder of the receipts to get the underlying shares on demand. The depository receipts themselves, which represent an interest in the underlying securities, are in turn securities that are capable of being listed on international stock exchanges.

The RBI has always been sensitive to the voting power of any shareholder in a bank. The RBI has written a law that requires any voting power in excess of 5 per cent in a private bank aggregated across "associated enterprises" "" a term defined in the tax laws governing transfer pricing, which encompasses all entities that are under common ownership, management or control "" to get prior consent of the RBI.

The RBI seems to have studied the practices that have evolved in the market in relation to GDRs and ADRs. The RBI has noticed that in most cases, depository agreements executed between the issuer companies and the depository do not contain provisions that enable voting in any form by the holders of the depository receipts. There are depository agreements that also provide for the depository voting in accordance with directions of the board of directors of the issuer company.

Curiously, the RBI has directed banks not to "give cognizance to voting by depositories in contravention of their agreements" with issuer banks. In other words, the RBI will be happy to see depositories vote in accordance with instructions of the banks, where the agreement provides for such voting instructions. The RBI has called for a copy of every agreement between every bank that has raised funds through GDRs and ADRs and its depository. The RBI has also now imposed a requirement on banks to get prior approval from the RBI before they amend any provision of the depository agreement.

This is interesting because even the Securities and Exchange Board of India (Sebi), which is concerned with voting rights in listed companies for purposes of the takeover regulations, has not gone into micro-regulation of voting rights. Acquisitions of GDRs and ADRs are currently exempt from takeover regulations unless the holder of these instruments actually converts these instruments into the underlying shares carrying voting rights.

Of course, in the listing agreement, Sebi has insisted on excluding all the shares underlying GDRs and ADRs from the scope of "public shareholding" since in reality, these shares never get traded in India, and, therefore, ought not to count for measuring liquidity of the public float in the Indian market. However, with the RBI throwing the spotlight on voting rights related to GDRs and ADRs, the doors of Indian regulatory oversight over depository receipts have been opened. Once one Indian regulator opens up an area of oversight, others follow suit. Watch this space.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)

somasekhar@jsalaw.com