The Securities and Exchange Board of India ("SEBI") has on October 10th 2019 issued a circular bearing number SEBI/HO/MRD/DOP1/CIR/P/2019/106 which sets out the framework ("Framework") for the issuance of depositary receipts ("DRs") by Indian companies.
For the purposes of the Framework,
- "DR" means a foreign currency denominated instrument, listed on an international exchange, issued by a foreign depository in a permissible jurisdiction on the back of permissible securities issued or transferred to a domestic custodian and includes 'global depository receipt' as defined in section 2(44) of the Companies Act, 2013 ("Companies Act").
- 'Permissible Securities' shall mean equity shares and debt securities, which are in dematerialized form and rank pari passu with the securities issued and listed on a recognized stock exchange.
- "Permissible Jurisdictions" shall mean jurisdictions notified by the Central Government from time to time.
- "International Exchanges" shall mean exchanges notified by the SEBI from time to time.
- "Investor Group" shall have the meaning as prescribed to such term in the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 or amendments thereof.
Under the Framework only companies incorporated in India and which are listed on a recognised stock exchange may issue DRs subject to fulfilling the following eligibility requirements:
- The issuer is a listed company is in compliance with the requirements prescribed under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and any amendments thereof.
- (a) the issuer company, any of its promoters, promoter group or directors or selling shareholders are not debarred from accessing the capital market by the SEBI; (b) any of the promoters or directors of the issuer company is a promoter or director of any other company which is not debarred from accessing the capital market by the SEBI; (c) the issuer company or any of its promoters or directors is not a wilful defaulter; (d) any of its promoters or directors is not a fugitive economic offender.
- Existing holders shall be eligible to transfer Permissible Securities, for the purpose of issue of DRs, if: (a) the issuer company or the holder transferring the Permissible Securities are not debarred from accessing the capital market by the SEBI; (b) the issuer Company or the holder transferring Permissible Securities is not a wilful defaulter; (c) the holder transferring Permissible Securities or any of the promoters or directors of the issuer company is not a fugitive economic offender.
- A company proposing to make a public offer and list on a recognized stock exchange, and also simultaneously proposing to issue Permissible Securities or transfer Permissible Securities of existing holders, for the purpose of issue of DRs and listing such DRs on an international exchange, may seek in-principle and final approval from Recognized Stock Exchange as well as International Exchange. However, such issue or transfer of permissible securities for the purpose of issue of DRs shall be subsequent to, the receipt of trading approval from the recognized stock exchange for the public offer.
Permissible Jurisdictions and International Exchanges:
- The issuer company shall be permitted to issue Permissible Securities or transfer Permissible Securities of existing holders, for the purpose of issue of DRs, only in Permissible Jurisdictions and said DRs shall be listed on any of the specified International Exchange(s) of the Permissible Jurisdiction.
- Listing of DRs on specified International Exchange must meet the highest applicable level / standards for such listing by foreign issuers.
Obligations of the Issuer Company
- The issuer company shall ensure compliance with extant laws relating to issuance of DRs, including, requirements prescribed in the Framework, the Companies Act, the Foreign Exchange Management Act, 1999 ('FEMA'), Prevention of Money-Laundering Act, 2002, and rules and regulations made thereunder. For this purpose, Listed Company may also enter into necessary arrangements with the Custodian, the Indian Depository and the Foreign Depository.
- The issuer company shall ensure that DRs are issued only with Permissible Securities as the underlying.
- The issuer company shall ensure that the aggregate of Permissible Securities which may be issued or transferred for the purpose of issue of DRs, along with Permissible Securities already held by persons resident outside India, shall not exceed the limit on foreign holding of such Permissible Securities under the applicable regulations of FEMA.
- The issuer company shall also ensure that the maximum of aggregate of Permissible Securities which may be issued by the issuer company or transferred by the existing holders, for the purpose of issue of DRs, shall be such that the issuer company is able to ensure compliance with the minimum public shareholding requirement, after excluding the Permissible Securities held by the depository for the purpose of issue of DRs.
- The issuer company shall ensure that the agreement entered with the Foreign Depository, for the purpose of issue of DRs, provides that the Permissible holder, including its Beneficial Owner(s), shall ensure compliance with holding limits prescribed under Paragraph 2.19 of the Framework.
- The issuance of DRs by the Indian listed companies require the prior approval of the Indian stock exchange on which the issuer company is listed. The issuer company shall, file with SEBI and the recognized stock exchange(s), a copy of the initial document, by whatever name called, for initial issue of DRs issued on the back of Permissible Securities. (a) SEBI shall endeavor to forward its comments, if any, to the recognized stock exchange(s) within a period of 7 working days from the receipt of the document and in the event of no comments being issued by SEBI within such period, it shall be deemed that SEBI does not have comments to offer. (b) Recognized Stock Exchange(s) shall take into consideration the comments of SEBI while granting in-principle approval to the issuer company and decide on the approval within 15 working days of receipt of application and required documents.
- Further, final document for such initial issue shall be filed with the recognized stock exchange(s) and the SEBI for record purposes.
- The issuer Company shall ensure that any public disclosures made by the issuer Company on International Exchange(s) in compliance with the requirements of the Permissible Jurisdiction where the DRs are listed or of the International Exchange(s), are also filed with the recognized stock exchange in India as soon as reasonably possible but not later than twenty four hours from the date of filing.
- Permissible holder for the purposes of the Framework means a holder of the DR, including its beneficial owner(s), satisfying the following conditions:
- who is not a person resident in India;
- who is not a Non-Resident Indian (NRI).
In light of the aforesaid, DRs cannot be issued to NRIs. The responsibility for ensuring the compliance with the aforestated conditions lies with the permissible holder i.e. the person/entity subscribing to the DRs.
- The issuer company shall ensure that the agreement entered between the holder of DRs, the Listed Company and the Depository provides that the voting rights on Permissible Securities, if any, shall be exercised by the DR holder through the Foreign Depository pursuant to voting instruction only from such DR holder.
- In case of a simultaneous listing of, Permissible Securities on recognised stock exchange(s) pursuant to a public offer / preferential allotment / qualified institutions placement under Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, and DRs on the International Exchange, the price of issue or transfer of Permissible Securities, for the purpose of issue of DRs by Foreign Depository, shall not be less than the price for the public offer / preferential allotment / qualified institutions placement to domestic investors under the applicable laws.
- Where Permissible Securities are issued by a Listed Company or 'transferred by the existing holders', for the purpose of issue of DRs by the Foreign Depository, the same shall be issued at a price, not less than the price applicable to a corresponding mode of issue of such Permissible Securities to domestic investors under the applicable laws.
Obligations of Indian Depository, Foreign Depository and Domestic Custodian
- Indian Depositories, in consultation with each other, shall develop a system to ensure that aggregate holding of DR holders along with their holding, if any, through offshore derivative instruments and holding as a Foreign Portfolio Investor belonging to same investor group shall not exceed the limit on foreign holding under the FEMA and applicable SEBI Regulations. For this purpose, Indian Depositories shall have necessary arrangement with the Domestic Custodian and / or Foreign Depository.
- Domestic Custodian shall maintain records in respect of, and report to, Indian depositories all transactions in the nature of issue and cancellation of depository receipts, for the purpose of monitoring limits.
- Indian Depositories shall coordinate among themselves and with Domestic Custodian to disseminate: (a) the outstanding Permissible Securities against which the DRs are outstanding; and (b) the limit up to which Permissible Securities can be converted to DRs.
- The Foreign Depository shall not issue or pre-release the DRs unless the Domestic Custodian has confirmed the receipt of underlying Permissible
Conclusion: The Framework is a welcome step enabling Indian companies to access foreign capital markets. However the Framework lacks clarity in various aspects. Firstly both debt instruments and equity shares are defined as "Permissible Securities", it is therefore not clear whether the Framework proposes to govern the issuance of DRs, with debentures as the underlying security. Furthermore, the regulations regarding pricing when the issuance of DRs. is not simultaneous with a public listing is ambiguous. Additionally it is important to note that DRs may not be subscribed by NRIs which appears to be an unwarranted restriction. Lastly, it would appear that Indian companies, which fulfil the criteria, need to wait as the Central Government has to notify "permissible jurisdictions" and the SEBI has to notify "international exchanges" on which the DRs of Indian companies maybe listed.
To conclude, in my view, the Framework in itself is an enabling
piece of legislation. However, it is for the SEBI and allied
regulators and/or stock exchanges to ensure that the issuance of
DRs does not entail complications in their implementation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.