ADR, GDR issue norms tightened

Unlisted companies will have to simultaneously list in domestic markets.

The government today tightened the norms for the issue of American depository receipts, global depository receipts and foreign currency convertible bonds by making it mandatory for companies to simultaneously list in the domestic stock market.

Companies, which have already issued ADRs, GDRs and FCCBs, would now be required to list on the bourses after making profits, beginning financial year 2005-06, or within three years of an issue, whichever was earlier, a finance ministry statement said. For example, Rediff, which has issued ADRs, will now have to list in India too.

For listed companies, the finance ministry specified that entities which were barred from raising funds from the Indian capital markets would not be eligible to issue FCCBs or ordinary shares through GDRs under the Foreign Currency Convertible Bonds and Ordinary Shares (through the depository receipt mechanism) Scheme, 1993.

Experts said the move, aimed at strengthening the Indian capital markets, would affect small start-ups, particularly in the information technology business.

"It seems that the government is trying to proactively check the quality of Indian companies tapping international funds", said an executive with a consulting firm.

Consultants advising companies on raising funds also said private placements could be a problem as only listed companies would now be able to raise FCCBs.

They also said the instrument had proved to be an effective tax-saving one as interest exemption was available to group companies.

The ministry also said that the erstwhile overseas corporate bodies, now domestic entities, which were not eligible to invest in India through the portfolio route, and entities prohibited to buy, sell or deal in securities by the Securities and Exchange Board of India, would not be allowed to subscribe to GDRs or FCCBs.

The rules for pricing GDRs and FCCBs now prescribe that the issues should be made at a price not less than the average of the weekly high and weekly low closing prices during the six months preceding the "relevant date", and the average weekly high and weekly low closing prices during the two weeks preceding the "relevant date".

The relevant date is 30 days prior to a general body meeting of shareholders to consider a proposed issue.

"The move is aimed at aligning the pricing mechanism with Sebi rules," said Akash Gupta of PricewaterhouseCoopers.

The finance ministry also said voting rights would be in line with those prescribed in the Companies Act, 1956. For banks, the Reserve Bank of India rules will be applicable.