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Seeking to throw open the depository receipts’ window wider, a Finance Ministry-appointed panel has recommended that Indian companies be allowed to issue these instruments in overseas markets against any underlying security, such as bonds, debentures, mutual funds etc.
Currently, Indian companies are allowed to issue depository receipts only against their underlying ordinary equity shares.
If this recommendation is accepted, Indian companies will be able to raise money abroad by issuing depository receipts (DRs) against debentures, bonds, mutual funds, collective investment schemes, G-Secs, exchange-traded funds or even shares of private companies.
A Boost This could bring depository receipts, which had become muted in recent years, back into fashion, say capital market observers.
The basic philosophy behind this recommendation by the M.S. Sahoo panel is to allow foreign investment in DRs in each underlying security where foreign investment is already directly allowed, sources privy to the panel’s recommendations said.
“When foreign investment is directly allowed in instruments, such as bonds, debentures, G-Secs, mutual fund units etc, then it should also be allowed in DRs with these securities as underlying,” sources said.
WHAT’s a DR? Depository receipts are negotiable (transferable) financial instruments that are traded on a local stock exchange but represent a security, usually in the form of equity, issued by a foreign, publicly-listed company. Basically, DRs make it easier to buy shares in foreign companies because shares of such a company do not have to leave the home State.
There are two popular DRs — global depository receipts and American depository receipts.
In India, DRs are created against the underlying equity shares of the Indian company in a predetermined ratio.
SAHOO PANEL The Centre had appointed the M.S. Sahoo Committee to undertake a comprehensive review of the depository receipt mechanism scheme put in place in 1993.
Depository receipts were the first option for Indian policymakers when they decided to throw open the economy to foreign investors in the early Nineties. The beginning of life with foreign investments started with DRs, it was pointed out then.
The Sahoo panel, which submitted its report to the Economic Affairs Secretary Arvind Mayaram on November 26, has suggested repeal of the 1993 GDR/FCCB (foreign currency convertible bonds) scheme.
The panel headed by Sahoo, a former SEBI whole-time member, has recommended the introduction of a contemporary scheme, it is learnt.
Legislative changes The recommendations have also factored in legislative changes, such as enactment of new company law, sources said.
The Sahoo panel is also learnt to have recommended that depository receipts’ be allowed to be issued and listed only in financial action task force (FATF)/ International Organisation of Securities Commissions compliant jurisdictions.
This will ensure that funds come into India only from the best markets and not through non-compliant jurisdictions.
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