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Govt accepts proposal to loosen rules on sale of depository receipts

LiveMint logoLiveMint 13-05-2014 Asit Ranjan Mishra

New Delhi: The finance ministry has accepted the recommendations of a committee that proposed a more liberal regime for Indian companies to access funds from overseas markets through the sale of so-called depository receipts (DRs).

The committee headed by M.S. Sahoo, a former member of the capital markets regulator Securities and Exchange Board of India (Sebi), had proposed allowing the sale of DRs against any underlying security—equity or debt—by any issuer, whether listed or unlisted. Only listed companies have until now been allowed to sell DRs and only against underlying equity shares.

DRs are securities sold outside of India by a foreign depository on the back of underlying Indian securities, deposited with an Indian custodian such as a commercial bank. Companies are allowed to raise capital abroad through American depository receipts traded on the New York Stock Exchange or global depository receipts traded in financial centres such as London, Luxembourg, Hong Kong and Singapore.

“Detailed consultations were held on the report with all relevant agencies/departments and thereafter it has been decided by the government to accept the report submitted by the committee,” the finance ministry said in a statement on Tuesday. “The new scheme suggested by the committee would be notified at a later stage after the necessary tax-related amendments are notified.”

The current regime dates back to 1993, when India’s capital markets were substantially closed to foreign capital and the domestic financial system was still evolving.

“In the last two decades, the equity market has developed considerably with sophisticated market infrastructure with active participation by both domestic and foreign investors as capital controls have been eased substantially,” the finance ministry said. “In this period, the Indian legal and regulatory system for financial markets has evolved with substantial changes. These developments warranted a fresh look at the scheme governing the issuance of DRs.”

The Sahoo committee recommendations would widen the universe of companies allowed to raise funds through DRs by allowing unlisted companies to tap the route against debt instruments such as debentures and bonds. DRs will count as public shareholding if they have attached voting rights for holders of the receipts.

The liberalization of the DR regime is a step in the right direction, said Prithvi Haldea, managing director of PRIME Database, which tracks primary markets. But he cautioned that the government needs to overhaul its surveillance mechanism so that companies do not resort to malpractices to raise money.

Changes proposed by the Sahoo committee include one to allow ‘unsponsored depository receipts’, meaning DRs issued against securities sold by another entity without the specific approval of the issuer of the underlying securities.

The draft scheme recommended by the committee covers only DRs; foreign currency convertible Bonds (FCCBs) have been left out of its ambit and they would continue to be governed by the existing scheme until further notification.

FCCBs are debt denominated in foreign currencies which offer the safety of guaranteed payments of a bond to investors with the option to convert the debt into equity.

The finance ministry had set up the Sahoo committee in September last year to review the regime governing DRs. The panel submitted its report in November.

The committee has recommended that no specific approval should be necessary for issue or creation of DRs on the back of any Indian securities.

“If market abuse in India is suspected, the Indian authorities have sufficient powers to investigate cross-border transactions across other FATF (Financial Action Task Force) and IOSCO (International Organization of Securities Commissions) compliant jurisdictions or in jurisdictions that have agreements with Sebi,” it said.

“Therefore, no additional approval for issue or creation of DRs on the back of Indian securities should be imposed by Indian laws,” it said.

FATF and IOSCO compliance is meant to guard against market abuse, money laundering and prevention of terror finance.

Under the present scheme, a listed company can issue DRs in any jurisdiction and an unlisted company can do so in either FATF- or IOSCO-compliant jurisdictions. In contrast, the committee recommends that a company, listed or unlisted, can issue DRs in a jurisdiction which complies with both FATF and IOSCO standards.

The Sahoo committee had also proposed that conversion of a DR into the underlying securities and vice versa should not be taxable.

“DRs should be allowed to be issued for non-capital raising as well as capital-raising purposes. It also recommends that there should be no end use restrictions on the funds raised through the issue of DRs,” the report said.

Currently, the funds raised through issue of DRs are not permitted for deployment in real estate and stock markets.

Regulations should be neutral irrespective of the source of capital raising by Indian companies, Shailesh Pathak, president of corporate strategy at SREI Infrastructure Finance Ltd. Simpler regulations will allow a level playing field between domestic and international capital markets, Pathak said. “In particular, Indian infrastructure companies with stable cash flows would get better valuations in international markets,” he said.

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