BS Primer: How US SEC recognition will benefit domestic issuances

The designated offshore securities market (DOSM) status given to the BSE by the US Securities and Exchange Commission (SEC) will reduce the regulatory burden and boost participation of US-based investors. 

Indian equities sold to US-based investors are subject to several restrictions, as the SEC categorises these as “restricted securities”. With the BSE obtaining DOSM status, securities listed on the BSE will not be subject to such restrictions. 

US investors dealing in securities listed out of the US need to comply with ‘Rule 144 of Regulation S’ under the US Securities Act. This rule applies to Indian companies that seek investments from US-based investors. However, securities offered through Rule 144 come with the term ‘restrictive’ and are subject to trading restrictions. Some of them include a minimum one-year holding period for restrictive shares. There are additional restrictions on sale of restrictive shares if the seller is an affiliate of the company. An affiliate cannot sell more than one per cent of the outstanding shares in any three months. Also, the seller has to file a proposed sale notice if the value of the transaction exceeds $50,000 or 5,000 shares in any three-month period. 

Even if a seller meets all the conditions for Rule 144, these shares cannot be re-sold to US investors until the restrictive ledger is removed from the share certificate.

“Only a transfer agent can remove a restrictive legend. But, the transfer agent won't remove the legend unless you've obtained the consent of the issuer — usually in the form of an opinion letter from the issuer’s counsel — that the restrictive legend can be removed. Unless this happens, the transfer agent doesn't have the authority to remove the legend and permit execution of the trade in the marketplace,” says the US SEC website.

With the BSE obtaining DOSM status, this changes. Shares that are being offered on the BSE platform would not be considered ‘restrictive’ and can be resold among US-based investors. Experts say the development will help domestic issuers. It will help market domestic paper issued through initial public offerings (IPOs) or institutional placement to a wider audience. It will also boost participation as it removes the lock-in requirement.

Legal experts say the development will also benefit Indian companies that have issued American Depository Receipts (ADRs), as conversion of depository receipts to shares will become easier.