A committee headed by M. S. Sahoo submitted its report on restructuring of the provisions on the issuance of depository receipts in November, 2013. The Ministry of Finance, in light of the recommendations of the Sahoo Committee, has repealed the archaic scheme of 1993 to the extent that it was applicable to DRs. The new scheme governing the issuance of DRs will be effective from 15 December, 2014, and regulators such as SEBI and RBI need to implement the same.
A DR is an instrument issued by a foreign depository, through public offering or private placement, with Indian permissible securities being the underlying securities. DRs may be issued in any of the 34 permissible jurisdictions listed under the scheme and may be listed on an international stock exchange. The new scheme widens the ambit of permissible securities and extends it beyond securities as defined under the SCRA, 1956 to include other similar instruments issued by private companies. Further, the scheme permits the issuance of unsponsored DRs wherein the issuance can be undertaken without the specific approval of the issuer of the underlying securities. Such DRs must grant the holder the right to issue voting instructions and must be listed on an international exchange.
To streamline the process, all approvals necessary for issuance or transfer of securities to a foreign entity will be applicable only at the stage when the underlying securities are being issued or transferred to the foreign depository, without further approvals at the time of issuance of DRs. The Ministry of Finance has incorporated safeguards for preventing abuse, such as, the prohibition on issuers from undertaking the issue at a price lower than the price applicable to the corresponding mode of issuance under Indian laws. Additionally, DRs may be categorized as public shareholding for the purposes of the SCRA only if the DRs are listed on an international stock exchange and the holder has the right to issue voting instructions.
The old scheme was not in line with the recent significant legal and regulatory changes. The overhaul is a welcome measure as it improves procedural clarity, enhances the viability of issuing DRs for attracting investment and for providing private companies with a new avenue for raising capital.