Currently, only listed companies can issue the instruments. The regulator is also expected to ease norms pertaining to two-way fungibility — conversion of shares to depository receipts and vice versa.
FM Nirmala Sitharaman had announced last week that Sebi will soon operationalise the Depository Receipt Scheme 2014, a framework that was approved five years ago but hasn’t been implemented.
Sebi didn’t respond to queries.
“Sebi has held discussions with industry to understand the challenges being faced by the bankers and companies wanting to issue depository receipts,” said one of the persons. “Some of the tweaks will also need an approval from other regulators including the Reserve Bank of India and income tax department. Sebi is expected to reach out to these regulators once the fine print is ready.”
The central government introduced depository receipt norms in 1993 for the first time. Unlisted companies were initially allowed to sell depository receipts. Those that did so included Rediff and Sify. In 2004-05, the government issued new norms restricting the instruments to listed companies.
“Allowing unlisted Indian companies to issue ADRs/GDRs will be a very positive step for Indian technology startups since they will be able to raise money from the same investors from whom their global competitors raise money,” said Sudhir Bassi, executive director, Khaitan & Co. “The move will also help in reviving capital-raising by Indian companies through depository receipts, a segment that has remained muted for the last four-five years.”
Legal experts said the scheme for unlisted companies will work in the same way as for listed entities. A company tenders shares to a global custodian, who issues depository receipts against them. Companies have the option of tendering either existing shares or new ones, thereby expanding the capital base. Unlisted companies have a narrower capital structure than listed ones. The ratio of depository receipts to shares will be based on this. For instance, in companies with a broader capital structure, one share can be equal to one depository receipt. At the other end, 1,000 depository receipts can be issued against a single share.
“The ratios can be fixed as per the requirement of the company,” said Sandeep Parekh, partner, Finsec Law Advisors. “Although these companies will list abroad, some of the domestic laws, including the Companies Act, will continue to apply since they are incorporated in India.”
Two-way fungibility will also help with raising money overseas. Currently, depository receipts can be freely converted into shares on domestic exchanges. However, converting fresh shares into depository receipts is subject to restrictions. Companies can only issue new depository receipts to the extent of those that have been converted into shares. For instance, if a company has issued depository receipts based on 100,000 shares and 10,000 of the instruments have been converted back into stock, the firm can only issue 10,000 depository receipts afresh. These restrictions impact the capital market offerings of companies, including buybacks and rights issues.
“In the past, some of the Indian regulators had concerns on relaxing the norms for depository receipts as the source of funds for subscribers will not be known in such issuances,” said Arjun Lall, partner, Cyril Amarchand Mangaldas. “However, instruments such as ADRs can be subscribed to by only institutional investors in overseas markets.”
The relaxed framework will only be applicable if the companies list in foreign jurisdictions that comply with anti-money laundering laws and are not considered tax heavens. This list is yet to be finalised by Sebi.
Depository receipts are instruments based on the shares of a company. Such receipts can be listed and traded on foreign stock exchanges. In developed markets such as the US, stock listings by foreign companies are subject to strict compliance measures. Depository receipts on the other hand have comparatively flexible norms and only institutional investors are allowed to trade in them.
Sebi had last year appointed a seven-member committee comprising market experts to recommend measures that should be implemented to facilitate listing of Indian companies on overseas stock exchanges.
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