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The finance ministry is planning to bring in a new liberalised depository regime, but the scheme might not fully take off, as there is not much clarity on taxes. Some of the clarity would come only in the next Budget, as it requires amendments in the Income Tax Act.
Thus, the firms planning to raise capital from foreign investors may have to wait till the next Budget to get complete clarity on the new regime for American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
Finance Minister Arun Jaitley, in his Budget speech, had announced the government would liberalise ADR/GDR regime to allow issuance of DRs on all permissible securities, but the Central Board of Direct Taxes (CBDT) did not make an enabling provision in the Finance Bill-2014 to recognise the new asset classes in the I-T Act. This left the Department of Economic Affairs (DEA) in a fix.
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"Not everything requires amendment to the I-T Act, some of it can be done through clarification in rules. Only one element needs amendment, which can happen only in next Budget. So, we can go ahead and notify the scheme," said a senior finance ministry official, asking for anonymity.
Under the new regime, local companies will be allowed to issue DRs - foreign currency-denominated trading instruments - on all kinds of securities such as debt, equity and mutual fund units. They will be allowed to issue 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. They will also be allowed to issue DRs for non-capital raising purposes such as improving liquidity, valuation or creating brand visibility in international markets.
"We can notify ADR/GDR but tax benefits will be available only from next year. So it may not take off fully from this year," said another official who did not wish to be identified.
The M S Sahoo panel, on whose recommendations the finance ministry is revamping DRs, had said the conversion of a DR into the underlying securities and vice versa should not be taxable events. It said the trading of DRs outside India should not attract any tax in India.
"The only tax benefit one gets today is that whatever is trading outside India between non-residents is not subject to tax in India. If the scheme is extended (to securities other than equities), the benefit should continue," said Vipul Jhaveri, Partner, Deloitte.
According to Section 115ACA of the I-T Act, GDR means any instrument in the form of a depository receipt or certificate created by overseas depository bank outside India and issued to non-resident investors against issue of ordinary shares or foreign currency convertible bonds of issuing company.
As such, it did not recognise other forms of depository receipts such as those issued against pure debt. The Economic Survey 2013-14 had said the new ADR/GDR scheme with an enlarged scope would be notified after the necessary tax related amendments are made. CBDT officials argued the provisions could not be made in this Budget, as they had limited time to look at the scheme.
The finance ministry is also planning to notify Indian Depository Receipts (IDRs), which will be a mirror image of ADR/GDR. IDRs are derivative instruments with underlying assets denominated in rupees for foreign companies to raise money in India.
"Once Sebi comments on IDRs are received it can be notified. It is completely delinked with ADR/GDR. There are no tax issues in IDR," said a third official.
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