The golden guideline for minimising losses in financial dealings is to have a portfolio as varied as possible. When it comes to diversifying their holdings, investors have long sought out more practical solutions. While the need for diversity may motivate an investor to explore opportunities in overseas markets, they may be put off from doing so because of the high costs and extensive paperwork involved in making direct investments abroad. Depository Receipts are a means to invest abroad while avoiding this issue (DRs). This financial instrument facilitates access to international financial markets. Depository Receipts can be listed on overseas stock markets as a means for a firm to raise capital and get exposure abroad. Bank deposit receipts are useful for stimulus arbitrage as well. When the value of a company’s DRs on a foreign stock exchange rises, so does its share price on the home market. Some investors take advantage of this by exchanging their DRs for the underlying shares and then selling them on the domestic market for a profit. A more restricted view from the government would result in less possibilities to enter the global market, which is why local restrictions play such a crucial part in these types of deals.[i]
Depository receipts are governed under the Companies Act, 2013, the Companies (Issue of Global depository receipts) Rules, 2014, and the Securities and Exchange Board of India Act, 1992 in India.A depository receipt is an item denominated in a currency other than the domestic one. It is issued by a foreign depository to a local custodian and is traded on international exchanges. A Global Depository Receipt (GDR) is defined in Section 2(44) of the Companies Act[ii], 2013 as any instrument in the form of a depository receipt, established by a foreign depository outside India and authorised by a business making an issue of such depository receipts. Because GDRs are listed and sold on overseas markets in foreign currencies, they provide Indian enterprises with easier access to foreign financing. The Companies (Issue of Global Depository Receipts) Rules, 2014 have been updated as of a new notice issued by the Central Government on the 13th of February, 2020. Companies (Issue of Global Depository Receipts) Amendment Rules, 2020,[iii] is the new name for the revised regulations.
There are three stages involved in the issuance of GDRs. These are listed as follows:
- Equity shares (in Indian currency) are issued by Indian corporations to a foreign depository bank via a local custodian bank.
- The equity shares are held in custody by the domestic custodian bank, which acts as the agent of the offshore depository bank.
- International investors can then purchase GDRs (in foreign currency) against the equity shares from the overseas depository bank.
The new notice has included certain new provisions and minor changes to the previous regulation. The primary extra requirements are that the depository receipts may be issued by a public offering, private placement, or any other method permitted by the laws of the relevant jurisdiction where they will be traded. The proceeds from depository receipts may be remitted to a Banking Unit at an International Financial Services Centre and must be used in accordance with RBI guidelines.[iv]
A corporation may issue depository receipts if it meets the requirements of the Scheme and the applicable rules of the Foreign Exchange Management Rules and Regulations. This marks the first process in the GDR filing.[v]
Depository receipts can only be issued once a company’s Board of Directors approves a resolution allowing for their issuance. Additionally, the issuing of depository receipts requires the previous consent of the shareholders via a special resolution submitted to the shareholders by the corporation. The shares underlying the depository receipts must be held in the custody of a domestic custodian bank, but the depository bank itself must be located outside of the United States.
Before and after the issuance of depository receipts, the firm must guarantee compliance with all relevant requirements of the Scheme and the rules, regulations, or guidelines published by the Reserve Bank of India.
A merchant banker, chartered accountant, cost accountant, or company secretary in good standing must be appointed by the company to oversee all compliances related to the issuance of depository receipts, and the compliance report obtained from such merchant banker, chartered accountant, cost accountant, or company secretary must be presented at a meeting of the company’s Board of Directors or the committee of the Board of Directors.
The depository receipts may be listed or traded on an overseas listing or trading platform and may be issued by a public offering, private placement, or any other means customary in the relevant foreign jurisdiction.
According to the circumstances that the Central Government or the Reserve Bank of India may prescribe or define from time to time, the depository receipts may be issued against the issuing of new shares or sponsored against shares held by shareholders of the firm.
The depository receipts shall be issued by the foreign depository bank in exchange for the underlying shares, which must be registered in the name of the foreign depository bank. After completing the method set forth in the Scheme and the requirements of the Companies Act, 2013, a holder of depository receipts may become a member of the company and is allowed to vote on the conversion of the depository receipts into the underlying shares.
Until depository receipts are converted, the overseas depository has the authority to vote on behalf of depository receipt holders in accordance with the terms of the agreement between the depository, the holders of depository receipts, and the firm. In the case of a sponsored issue of depository receipts, the proceeds must be deposited in an Indian bank with overseas operations, or in a foreign bank that is a Scheduled Bank under the Reserve Bank of India Act, 1934[vi] and has operations in India, with the understanding that the foreign bank with operations in India will be responsible for providing any and all information that may be necessary.
In the case of depository receipts, the offer document will not be considered a prospectus or an offer document and will not apply to the issuance of depository receipts. The name of the foreign depository bank must be recorded in the company’s Register of Members prior to the redemption of depository receipts.
However, in recent times, SEBI has garnered many manipulation cases in the name of GDR due to which it has imposed fines over 31 Cr on 14 entities.[vii] The Supreme Court has also taken cognizance of such malpractices and ordered to stop it in multiple cases. One of the cases that reaffirm such statements is that of SEBI v. Pan Asia Advisors ltd[viii], wherein the Supreme Court held that such manipulations should be brought down.
Another recent case to the use of manipulation of GDR’s for acquisition of loans and other items is that of NAKODA ltd.[ix] The issue in this particular case arose from a probe by Securities and Exchange Board of India (“SEBI”) into whether or not Indian corporations defrauded Indian investors by issuing Global Depository Receipts (“GDRs”) on foreign exchanges. As part of its inquiry, SEBI learned of additional GDR offerings in which a foreign corporation had obtained financing and the GDR issuer had pledged or charged off an account to cover the loan’s costs. SEBI found NAKODA guilt of such malpractice. On the matters of delay of issuance of GDRs, SAT (Securities Appellate Tribunal) has also passed judgments which clear the stand of the situation. The Supreme court in the case of G.V Films ltd[x] said that delay in the issuance of show cause notice in the matter of issuance of GDR’s is reasonable because the investigation may also include going beyond territory which may take time.
To conclude, GDRs help corporations get access to a global pool of investors. Global Depository Receipts (GDRs) provide investors arbitrage possibilities due to their tradability on numerous marketplaces. To broaden and diversify their pool of possible investors, globalisation aids like GDRs are invaluable for multinational corporations. They have the ability to raise the market value of a company’s shares. However, they should also be strictly monitored and regulated so that investors don’t defraud banking institutions with it.
[i] IBLOG PLEADERS- https://blog.ipleaders.in/voting-rights-holders-depository-receipts-abroad-analysis/
[ii] Companies Act 2013, §2(44), No.18, Acts of Parliament, 2013 (India)
[iii] SEBI- https://www.sebi.gov.in/sebi_data/attachdocs/apr-2017/1492004818999.pdf
[iv] India Filings- https://www.indiafilings.com/learn/companies-issue-of-global-depository-receipts-rules/#:~:text=As%20per%20Section%202(44,issue%20of%20such%20depository%20receipts.
[v] Asian Laws- https://www.asianlaws.org/blog/a-guide-to-companies-issue-of-global-depository-receipts-rules-2014/
[vi] Reserve Bank of India Act,1934, No.23, Acts of Parliament, 1934 (India)
[vii] Economic Times India- https://economictimes.indiatimes.com/markets/stocks/news/gdr-manipulation-case-sebi-slaps-over-rs-31-cr-fine-on-14-entities/articleshow/83349820.cms?from=mdr
[viii] Securities and Exchange Board of India Vs. Pan Asia Advisors Ltd. and Another, Civil Appeal No. 10560 of 2013. Supreme Court of India judgment dated July 6, 2015. AIR 2015 SC 2782
[ix] Order in the matter of GDR issues of Nakoda Ltd- https://www.sebi.gov.in/enforcement/orders/oct-2021/order-in-the-matter-of-gdr-issue-of-nakoda-ltd_53297.html
[x] G.V Films Ltd. v. SEBI , SAT Appeal No.168 of2020
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