Framework for Issue of Depository Receipts

The Securities and Exchange Board of India (“SEBI”) vide its circular dated October 10, 2019, has notified a detailed framework for issuance of depository receipts (“DRs”) by a company incorporated and listed on a recognized stock exchange in India. The new framework which has come into force with immediate effect, sets out eligibility requirements as well as certain obligations to be complied with by issuers of DRs. Further, the Depository Receipts (Amendment) Scheme, 2019 has also been notified on October 7, 2019 which amends the definition of ‘permissible jurisdiction’, inter alia, to include the International Financial Services Centre in India.

Under the provisions of the erstwhile Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, DRs could be issued only by companies listed on Indian stock exchanges. This scope was broadened vide the Depository Receipts Scheme, 2014 (“2014 Scheme”) notified by the Ministry of Finance on October 21, 2014, to permit issuances of DRs by both listed and unlisted companies. However, pursuant to the recent SEBI circular, this scope has once again been restricted to only listed companies being permitted to issue DRs.

For the purposes of the new framework, ‘permissible securities’ have been defined to 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”. Previously, under the 2014 Scheme, companies were only required to comply with eligibility requirements pertaining to prohibition from accessing capital markets or dealing in securities. However, the current framework now prescribes certain additional requirements including not being declared as a willful defaulter or a fugitive economic offender.

In addition to the requirements under the Companies Act, 2013 and the 2014 Scheme, the current framework sets out certain additional requirements for issuances of DRs. A permissible holder i.e. holder of DRs now excludes an Indian and a non – resident Indian, which is over and above the requirements of the 2014 Scheme. The onus of the compliance with this requirement lies with the permissible holder (including beneficial owner). The standard terms and conditions of DRs being issued by Indian companies would now need to be amended to encapsulate this requirement.

A listed company issuing DRs is also now required to file with the Indian stock exchanges, any public disclosure made to the international stock exchange within 24 hours from the date of filing. The issuer would also be required to file the offer document for an initial issue of DRs with SEBI and the stock exchanges to seek their comments, if any. The SEBI and stock exchanges are required to provide comments within the prescribed timelines. This is a completely new requirement, as historically, neither SEBI nor the Indian stock exchanges have ever reviewed offer documents for DR issuances.

A listed company issuing DRs is also required to ensure compliance with extant laws including compliance with the minimum public shareholding requirements and limits on foreign investment holding under the FEMA. As regards pricing, the current framework provides that the pricing of DR issuances would have to be undertaken at a minimum price equivalent to the price determined for corresponding mode of issue to domestic investors.

Furthermore, the current requirements relating to exercise of voting rights have also been modified under the new framework. Under the 2014 Scheme, while the exercise of voting rights on the shares underlying the DRs could be dealt with contractually under the deposit agreement, if such voting rights were not exercisable by the DR holders, the shares would not be counted towards minimum public shareholding requirements. However, under the revised framework, voting rights on the underlying shares are mandatorily required to be exercised only by DR holders.

Authors:
Avanti Kale, Associate

Date: December 6, 2019