The finance ministry will soon come out with a scheme to streamline norms for Indian companies going for American depository receipts (ADRs) and global depository receipts (GDRs) — mechanims for raising of funds in the US and Europe through equity issues.
According to a finance ministry background note for Economic Editors’ Conference slated to be inaugurated tomorrow by Finance Minister Pranab Mukherjee, the scheme will allow an Indian company that has done an initial public offer to do an ADR or GDR issue only after an year. Currently, firms are allowed to go for fresh funds via equity in the next six months.
“This was allowed to us earlier also but there was lack of clarity,” said Jimmy Patel, CEO at Quantum MF. “So we did not invest in ADRs and GDRs. If we invest there, it falls under overseas market criteria. If some clarity comes up, this may increase the arbitrage opportunity.”
For a mutual fund scheme to be eligible for taxation as an equity oriented scheme, it should invest at least 65 per cent of its portfolio in Indian shares. Investments in ADRs/GDRs would deprive investors of this tax benefit if the exposure to stocks listed on Indian bourses falls below 65 per cent. There are very few firms that are not listed in India and have issued their ADRs/GDRs on overseas bourses.
The other provisions of the scheme would allow an Indian company that has done an initial public offer to do an ADR/GDR issue only after one year. Currently companies are allowed to go for fresh funds through equity in the next six months. This requirement is being moderated because companies should, at the time of IPOs, have a fair idea about the required funds.
The other provisions of the scheme would mandate that a third of the incremental equity raised through ADR or GDR be offered in the domestic market. This, analysts said, would complicate the ADR, GDR market as there is no such requirement at present. The scheme, to be based on the recommendations of Planning Commission member Saumitra Chaudhuri report will be “notified shortly,” the background note said.
The need to change norms for ADRs and GDRs comes after Sebi last month barred seven companies from issuing any shares or convertible instruments or alter their capital structure till further directions after it found proof of these firms manipulating their GDR issues. The regulator also banned some foreign investors from stock market for their role in GDR manipulation.
As the current sovereign ratings of India are mostly at the bottom of investment grade, the ministry is talking to these agencies to put forward a case for better rating.
Earlier, a decision was taken at the Financial Stability and Development Council to present India’s case for higher rating by studying the methodologies adopted by the rating agencies.
The note said Fitch team visited India this April and affirmed its existing rating, but appreciated India’s management of economy. Fitch rated India at lower investment grade of BBB-.
The note also said Moody’s are scheduled to visit the Finance Ministry on November 14. Moody’s also rated India at lower grade of Baa3 for its foreign currency market and lower than investment grade of Ba1 for domestic currency market.