SEBI Notifies Framework for Monitoring of Foreign Holding in Depository Receipts

SEBI has notified certain operational guidelines for the monitoring of foreign holding in depository receipts, by way of a circular dated October 01, 2020.

This notification follows a previous circular issued by SEBI on October 10, 2019, wherein it prescribed a framework for the issue of depository receipts by listed companies. Under such framework, Indian Depositories are required to (i) develop a system to ensure that the aggregate holding in depository receipts of entities belonging to the same investor group (including their holding through offshore derivative instruments and as a foreign portfolio investor) does not exceed the applicable limits on foreign holding; (ii) implement necessary arrangements with domestic custodians and / or foreign depositories in relation to item (i); and (iii) disseminate certain information regarding outstanding depository receipts and the available limits for their conversion to securities, in coordination with domestic custodians (‘DR Framework’). Our Client Alert dated December 06, 2019 on the DR Framework can be accessed here.

Set out below are the key takeaways from SEBI’s circular dated October 1, 2020 (‘DR Operational Guidelines’):

1.     Applicability

The DR Operational Guidelines are applicable to listed companies, Indian depositories, domestic custodians, depository participants, foreign portfolio investors (‘FPIs’) and foreign depositories.

2.     Scope

The DR Operational Guidelines, amongst other things, prescribe the (i) process for monitoring foreign holding (including investor group limits) in depository receipts (‘DRs’); (ii) mechanism for re-issuance of DRs; (iii) reporting requirements of domestic custodians as well as of FPIs; (iv) manner of dissemination of DR related information and processes; and (v) basis of calculation of limits for conversion of permissible securities into DRs.

3.     Key Compliances

Reporting Requirements

i.     All FPIs are required to report to their designated depository participants (‘DDPs’), the details of (a) other FPIs forming part of the same investor group; and (b) subscribers to offshore derivative instruments (‘ODI Subscribers’) and / or holders of DRs (‘DR Holders’), having common ownership, directly or indirectly, of more than 50% or which are under common control with such FPI.

ii.    Each investor group as identified above, may appoint one FPI as the nodal entity, which will be responsible for the aforementioned reporting in the format prescribed by SEBI, which format comprises of details such as name, registration number, category of FPI, jurisdiction of establishment, etc. (‘Nodal FPI’).

iii.    The Nodal FPI is also required to report to its domestic custodian, the holdings of the ODI Subscribers and / or DR Holders as identified above, in underlying Indian securities, including securities held in their depository receipt account, upon conversion. Such reporting is to be made on a monthly basis (by the 10th of every month), in the format prescribed by SEBI.

iv.     FPIs which do not belong to the same investor group are also required to make a similar reporting to their domestic custodians, in respect of their holdings as ODI Subscribers and/or DR Holders, in the format prescribed by SEBI.

v.     The DDP and / or the custodian, as applicable, are required to report the information provided by the Nodal FPI to the concerned Indian depository on a monthly basis (by the 17th of every month).

Monitoring of Investment Limits

i.    Every listed company which has issued DRs is required to appoint one Indian depository as its ‘designated depository’, which will be responsible for monitoring the limits on foreign holding in DRs issued by such listed company.

ii.   The depository monitoring FPI group limits is required to consider the aggregate of the DR holding, holding in offshore derivative instruments and FPI holding of the same group, on a monthly basis, in order to determine the applicable investment thresholds. The relevant DDP / custodian will be responsible for such monitoring with respect to FPIs which do not belong to the same group.

iii.   Excess holdings, as may be notified to the FPIs by the depository / custodian, are required to be divested within five trading days.

4.     Way Forward

Upon notification of the DR Framework, SEBI has also subsequently published a list of permissible jurisdictions and international stock exchanges for the purpose of issuance and listing of DRs. With the issuance of the DR Operational Guidelines, all aspects of the DR Framework stand notified as on date.

Accordingly, going forward, listed companies issuing DRs are required to ensure compliance with the DR Operational Guidelines in addition to compliance with other applicable law, including the Companies Act, 2013, read with the Companies (Issue of Global Depository Receipts) Rules, 2014, the Depository Receipts Scheme, 2014, and the DR Framework.

Date: October 23, 2020