The Central Government, in order to facilitate the issue of depository receipts outside India, notified a scheme to be known as ‘Depository Receipts Scheme, 2014’ (‘Scheme’ for short). This scheme was notified vide Notification No. F. No. 9/1/2013-ECB, dated 21.10.2014. The scheme has been notified in the Gazette of India Vide No. 254, dated 24.10.2014. This scheme came into effect from 15.12.2014. This scheme repealed the ‘Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1999.
Implementing authorities
The implementing authorities of this scheme are as follows:
- Reserve Bank of India;
- Securities and Exchange Board of India;
- Ministry of Corporate Affairs; and
- Ministry of Finance.
Depository Receipt
Clause 2(d) of the scheme defines the term ‘depositor receipt’ as a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in Section 2(44) of Companies Act, 2013.
Permissible jurisdiction
Clause 2(g) defines the term ‘permissible jurisdiction’ as foreign jurisdiction which is a member of the Financial Action Task Force on Money Laundering and the regulator of the securities market in that jurisdiction is a member of the International Organization of Securities Commission. Schedule I of the scheme gives the list of permissible jurisdiction as detailed below:
- Argentina;
- Australia;
- Austria;
- Belgium;
- Brazil;
- Canada;
- China;
- Denmark;
- European Commission;
- Finland;
- France;
- Germany;
- Greece;
- Hong Kong, China;
- Iceland;
- Ireland;
- Italy;
- Japan;
- Republic of Korea;
- Luxemburg;
- Mexico;
- The Netherlands;
- New Zealand;
- Norway;
- Portugal;
- Russian Federation;
- Singapore
- South Africa;
- Spain;
- Sweden;
- Switzerland;
- Turkey;
- United kingdom;
- United States.
Permissible Securities
Clause 2(h) defines the term ‘permissible security’ as ‘securities’ as defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 and include similar instruments issued by private companies which may be acquired by a person resident outside India under the Foreign Exchange Management Act, 1999 and is in dematerialized form.
Foreign Depository
Clause 2(C) defines the term ‘foreign depository’ as a person which is not prohibited from acquiring permissible securities and is regulated in a permissible jurisdiction and has legal capacity to issue depository receipts in the permissible jurisdiction.
Eligibility
Clause 3 of the scheme describes the eligibility of issue of depository receipts. The following persons are eligible to issue or transfer permissible transactions to a foreign depository for the issue of depository receipts:
- Any Indian company, listed or unlisted, private of public;
- Any other issuer of permissible securities;
- Any person holding permissible securities
which has not been specifically prohibited from accessing the capital market or dealing in securities. Unsponsored depository receipts on the back of the listed permissible securities can be issued only if such depository receipts gave the holder the right to issue voting instruction and are listed on an international exchange.
Procedure
The following is the procedure for the issue of depository receipts:
- The aggregate of permissible securities which may be issued or transferred to foreign depositories for issue of depository receipts, 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 FEMA, 1999;
- The depository receipts may be converted to underlying permissible securities and vice versa;
- A foreign depository may issue depository receipts by way of a public offering or private placement or in any other manner prevalent in a permissible jurisdiction;
- An issuer may issue permissible securities to a foreign depository for the purpose of issue of depository receipts by any mode permissible for issue of such permissible securities to investors;
- The holders of permissible securities may transfer permissible securities to a foreign depository for the purpose of the issue of depository receipt, with or without the approval of issue of such permissible securities through transactions on a recognized stock exchange, bilateral transactions or by tendering through a public platform;
- The permissible securities shall not be issued to a foreign depository for the purpose of issuing depository receipts at a price less than the price applicable to a corresponding mode of issue of such securities to domestic investors under the applicable laws;
- Any approval necessary for issue or transfer of permissible securities to a person resident outside India shall apply to the issue or transfer of such permissible securities to a foreign depository for the purpose of issue of depository receipts. Subject to this the issue of depository receipts shall not require any approval from any Government agency if the issuance is in accordance with the scheme.
Rights and duties
The following are the rights and duties for the foreign depository:
- The foreign depository shall be entitled to exercise voting rights, if any, associated with the permissible securities whether pursuant to voting instruction from the holder of depository receipts or otherwise;
- The shares of a company underlying the depository receipts shall form part of the public shareholding of the company under Securities Contracts (Regulation) Rules, 1957, if-
- the holder of such depository receipts has the right to issue voting instruction; and
- such depository receipts are listed on an international exchange;
- In the cases not covered under second point, shares of the company underlying depository receipts shall not be included in the total shareholding and in the public shareholding for the purpose of computing the public shareholding of the company;
- A holder of depository receipts issued on the back of equity shares of a company shall have the same obligations as if it is the holder of the underlying equity shares, if it has the right to issue voting instruction.
Obligations
Clause 8 of the scheme imposes certain obligations on the domestic custodian which are-
- to ensure that the relevant provisions of the scheme related to the issue and cancellation of depository receipts is complied with;
- to 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 under the FEMA, 1999;
- to provide the information and data as may be called upon by SEBI, the RBI, Ministry of Finance, Ministry of Corporate Affairs and any other authority of law; and
- to file with SEBI a copy of the document by whatever name called, which sets the terms of issue of depository receipts issued on the back of securities, as defined under Section 2(h) of SCRA, 1956, in a permissible jurisdiction.
The following are the obligations imposed on the Indian Depositories-
- they shall co-ordinate among themselves;
- they shall disseminate the outstanding permissible securities against which the depository receipts are outstanding; and
- they shall disseminate the limit up to which permissible securities can be converted to depository receipts.
A person issuing or transferring permissible securities to a foreign depository for the purpose of the issue of depository receipts shall comply with relevant provisions of the India law, including the scheme, related to the issue and cancellation of depository receipts.
Market abuse
Clause 10 clarifies that any issue, intended or otherwise, of depository receipts or market of depository receipts in a manner, which has potential to cause or has caused abuse of the securities market in India, is market abuse and shall be dealt with accordingly.
