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The Finance Ministry is expanding the ambit of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
Taking forward the interim Budget announcement, the Ministry will first “allow non-sponsored ADRs/GDRs with ordinary shares as the underlying asset,” a senior Finance Ministry official told Business Line . In due course, bonds and government securities will be permitted as underlying assets, as permitting these need legislative changes. The move, when implemented, will make it easier for non-promoters in a company to raise money from abroad.
Depository receipts are instruments denominated in a foreign currency, issued by foreign institutions and listed in the country where they have been issued. These instruments have underlying assets such as shares. ADRs relate to receipts denominated in American dollars and listed on US stock exchanges. GDRs are receipts issued in foreign currencies other than the US dollar.
Non-sponsored ADRs/GDRs are called level 1 depository receipts that are currently not permitted.
How it worksAt present, ADR/GDR can be issued with the ordinary shares of a company as the underlying asset. This is called a sponsored ADR. The custodian gets the shares and issues receipts on the basis of these shares to investors abroad, and passes on the funds mobilised to Indian promoters. ADRs/GDRs can be traded like a share. Currently, ADRs of 10 Indian companies are available for trading on Indian exchanges, while that of four Indian companies are available for trading in US over the counter.
The new non-sponsored ADRs/GDRs will work this way: “Anybody with the shares of a company can tender them to a custodian. The custodian will use these to issue receipts for raising funds abroad. Only, the funds will be with the shareholder and the custodian. In the record book of the company, the custodian will be the shareholder,” the official said.
The dividend, if announced by the company, would be credited into the custodian account and to the depository receipt holders, he added.
According to Sunil Jain of J Sagar Associates, non-promoters will have to adhere to the rules and provisions prescribed in the Companies Act 2013 before tendering shares to a custodian.
The shareholder will need to take approval from the company which, in turn, will ensure that the sectoral foreign investment limit is not breached as the shares are being transferred to a foreign entity.
The voting rights on such shares will be subject to negotiation as in the present system. Currently, issuers of sponsored depository receipts usually go with the promoters when voting is required.
The revamp of the ADR/GDR system is based on the recommendations of Finance Ministry-appointed MS Sahoo panel report. The panel suggested issuing depository receipts by Indian companies against any underlying security such as debentures, bonds, mutual fund units, collective investment schemes, G-Secs, exchange traded funds or even shares of private companies apart from the current practice of a company’s ordinary equity shares.
The panel submitted its report to Economic Affairs Secretary Arvind Mayaram in November 2013.
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