January 13, 2015

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A Close Look At The Depository Receipts Scheme, 2014

- Madhur Kohli, [ ]
- Ragini Aiyer, [ ]
- Aayush Mohata, [ ]

Madhur Kohli, Ragini Aiyer & Aayush Mohata

The Scheme, in order to safeguard the interests of domestic investors, attempts to implement control over fluctuations in price at which fresh securities are issued, against which potential depository receipts are to be issued

The Ministry of Finance ("MoF"), on October 21, 2014, notified the Depository Receipts Scheme, 2014, ("Scheme"), amending and repealing the lssue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 ("Erstwhile Scheme"), to the extent applicable to the issuance of depository receipts. The Scheme was implemented, pursuant to the recommendations of the committee to Review the FCCBs and Ordinary Shares (Mechanism) Scheme, 1993 ("Committee"), with a view to increase participation by Indian companies in overseas financial markets and to facilitate raising of capital from global investors.

Since its introduction, the Erstwhile Scheme has been amended numerous times, which at times led to anomalies, leading to confusion among market participants. For example, pricing norms which were relaxed in November 2008, created an arbitrage opportunity to structure deals, due to relevant date being linked to the board decision to issue such securities. There have also been many changes in the legal and regulatory environment in recent years, for example the notification of several sections of the Companies Act, 2013 ("Companies Act") and partial repeal of the Companies Act, 1956 ("Erstwhile Companies Act"). The Erstwhile Companies Act did not define the term 'global depository receipts', which has now been defined under the Companies Act and a framework thereof has been provided under the Companies (Issue of Global Depository Receipt) Rules, 2014.


The Scheme, governing the issue depository receipts, shall come into force from December 15, 2014 and will be implemented by notifications or circulars to be issued by the Reserve Bank of India ("RBI"), the Securities and Exchange Board of India ("SEBI"), the Ministry of Corporate Affairs ("MCA") and the MoF.

Classification Of Depository Receipts

Depository Receipts are generally classified as under:


A sponsored issue of depository receipts is based on a formal agreement, between the foreign depository and the issuer of securities for the creation of the depository receipts. The sponsored depository receipts can be further classified as:

Capital Raising: The Indian issuer deposits the freshly issued securities with the domestic custodian. On the basis of such deposit, the foreign depository then creates/issues depository receipts abroad for sale to global investors. This constitutes a capital raising exercise, as the proceeds of the sale of depository receipts eventually go to the Indian issuer.

Non-Capital Raising: In a non-capital raising issue, no fresh underlying securities are issued. Rather, the issuer gets holders of its existing securities to deposit these securities with a domestic custodian, so that depository receipts can be issued abroad by the foreign depository. This is not a capital raising exercise for the Indian issuer, as the proceeds from the sale of the depository receipts go to the holders of underlying securities.


Where there is no formal agreement between the foreign depository and the Indian issuer, any person, without any involvement of the issuer, may deposit the securities with a domestic custodian in India. A foreign depository then issues depository receipts abroad on the back of such deposited underlying securities. The proceeds from the sale of such depository receipts go to the holders of the underlying securities. Based on whether a depository receipt is traded in an organised market or in the Over the Counter ("OTC") market, the depository receipts can be classified as listed or unlisted.

Listed: Listed depository receipts are traded on formal exchanges.

Unlisted: The unlisted depository receipts are those which are inter-traded between parties and where such depository receipts are not listed on any formal exchanges.


Under the Erstwhile Scheme, a listed company can issue shares for issue of depository receipts in any jurisdiction and an unlisted company can do so in either a jurisdiction which is a member of the Financial Action Task Force on Money Laundering ("FATF") and the securities market regulator of the jurisdiction, is a member of the International Organisation of Securities Commissions ("IOSCO"). The Scheme, however, provides for permissible jurisdictions where the depository receipts may be issued.

The Scheme envisages the following entities to be eligible to issue or transfer permissible securities to a foreign depository:

  1. any Indian company, whether private or public in nature and whether unlisted or listed on a recognised stock exchange;
  2. any Issuer of permissible securities; and
  3. any person holding permissible securities.

The Scheme also allows for unsponsored depository receipts on the basis of underlying permissible securities only in cases where such securities are listed on an international stock exchange and where voting rights are permitted to the holder of such securities.

Modes Of Issue

Under the Scheme, the depository receipts issued on the basis of underlying equity shares may be made either through the mode of a public offering, a preferential allotment or a qualified institutional placement ("QIP"). The present QIP regulatory framework does not include Foreign Depository within the definition of a QIB, thereby disallowing any such issuance.


These issuances are subject to adherence to the foreign investment regime under the Foreign Exchange Management Act, 1999 ("FEMA"), including the sectoral caps and pricing.

Further, the Scheme lays down the following restrictions, to be adhered to, pursuant to the issue of depository receipts:

  1. The aggregate of the permissible securities issued or transferred to a foreign depository along with the permissible securities already held by persons residing out of India, may not be in excess of the limit of foreign holding as prescribed under FEMA.
  2. The conversion from depository receipts to permissible securities and vice versa shall be subject to the limits laid down under the FEMA.

Pricing Of Permissible Securities

The underlying securities issued to the foreign depository for the purpose of issuing depository receipts may not be issued at a price lesser than the price at which such underlying securities may be offered to domestic investors, as per the applicable laws. Any preferential allotment to the foreign depository for the above mentioned must necessarily be in compliance, with pricing laid down under the SEBI (Issue of Capital and Disclosure) Regulations, 2009 ("SEBI ICDR").

With regards to 'pricing', the Committee in its Report recommended to the MoF that permissible securities should not be issued to a foreign depository, in order to issue depository receipts, at a lesser price than that which applies to a parallel means of issue of such securities to domestic investors under the SEBI ICDR. It was deemed that the floor price norm that governs unlisted companies and deals with calculation of the floor price on the basis of discounted cash flows was unfeasible and therefore it was recommended that the RBI should assess and consider modification of the same.

The Erstwhile Scheme mandated that the provisions of the Foreign Exchange Management Act, 1999 would govern the pricing in case of unlisted companies. For unlisted companies, a SEBI registered Category-I Merchant Banker or a Chartered Accountant is required to conduct fair valuation of shares, as per the 'discounted free cash flow method'. The Committee was of the opinion that such method may be misused to undermine the aim of the valuation itself and therefore, the RBI should contemplate amending the provision. Moreover, the Committee recommended that no enactment should mandate a particular pricing norm.

Rights Of The Depository Receipts Holder

The Scheme grants certain rights which are transferable pursuant to the transfer of underlying permissible securities on the back of which the depository receipts to the foreign depository is issued.

  1. The Foreign Depository shall be entitled to voting rights, whether arising out of voting instructions or otherwise
  2. The shares of a company which form, the underlying security for the issue of depository receipts shall be considered as part of the public shareholding of that particular company as is provided for, under the Securities Contract (Regulation) Rules, 1957, if:

i. the holder of such depository receipts has the right to issue voting instructions and

ii. the said depository receipts are listed on an international stock exchange.

Further, the holder of depository receipts shall have the same obligations as if it was the holder of underlying equity shares.

Obligations Under The Scheme

The Scheme, in furtherance to its objective, lays down certain obligations on the 'domestic custodian' of depository receipts, namely:

  1. Compliance with related provisions of the Scheme with regard to issuance and cancellation of the depository receipts is to be ensured.
  2. For the purpose of monitoring foreign investment limits under FEMA, to record and report to the Indian depositories, all transactions with regard to issuance and cancellation of depository receipts.
  3. To provide information and data to regulatory authorities, such as the RBI, SEBI, MCA, MoF, etc., as and when required.
  4. To file with SEBI, the document, which sets the terms of issue of depository receipts, issued on the back of securities, as defined under Section 2 (h) of the Securities Contract (Regulation) Act, 1956.

The Scheme further provides for Indian depositories to coordinate amongst themselves, with regard to information about the limit up to which securities may be converted into depository receipts and the outstanding securities against which depository receipts are outstanding.

Market Abuse

In an unprecedented move, the Scheme, intending to put in place safeguards, against any market manipulation or abuse, distinctly defines market abuse to be, any use, intended or otherwise, of the depository receipts, in a manner which may have the potential to cause or have caused, abuse of the Indian securities market. Further, to clarify, all the activities prohibited under Chapter VA of the Securities and Exchange Board of India Act, 1992 are brought within the definition of 'market abuse', under the Scheme.

The Committee in its report to the MoF noted that due to their exchangeability, the market for depository receipts in a foreign jurisdiction is directly connected with the domestic market for the underlying Indian securities. In other words, any market abuse affecting the Indian market using the depository receipts overseas will undoubtedly impact the Indian securities market and therefore, the Scheme asserts that any market abuse of the Indian securities market, only because it may be associated with depository receipts in the foreign jurisdiction, would not oust the jurisdiction of the SEBI Act, 1992. A mechanism using depository receipts to influence price and conduct sham securities transactions in India would violate section 12A in Chapter VA of the SEBI Act, 1992. The Scheme therefore deems that SEBI, being the regulator of the market for securities, is the appropriate authority to inquire into market abuse related to crossborder transactions dealing with depository receipts on the back of securities, as contemplated under the Securities Contracts (Regulation) Act, 1956.


The Scheme has synchronised the depository receipts issuance with the Companies Act and the Companies (Issue of Global Depository Receipts) Rules, 2014. It provides for sufficient safeguards while easing the process, for domestic entities, to utilise this route as a mode to raise capital, from foreign capital markets. The Scheme also intends to bring the foreign depository and domestic custodian within the regulated framework, which is a welcome change.

The significant reduction in the use of this mechanism, in recent times, prompted a need for clarity and relaxation for Indian entities to utilise the Indian equity instruments and get global market access by way of conversion. This Scheme, effectively attempts to provide for the same.

The Scheme, in order to safeguard the interests of domestic investors, attempts to implement control over the fluctuations in price at which fresh securities are issued, against which potential depository receipts are to be issued. If this is not ensured, depository receipts issued to a foreign investor against securities may be at reduced price than the corresponding issue price for the underlying securities issued to investors. The pricing is therefore being brought in line with the domestic regime and compliance with the SEBI ICDR is mandated.

The Scheme seeks to simplify and modernise the procedure and mechanism, used for the issuance of the depository receipts by Indian entities and it is to be seen if the notifications or circulars for implementation of the Scheme by RBI, SEBI, MCA and MoF complements the Scheme by laying clear regulations for implementation of the depository receipt framework.


Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.

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