Depository banks approach Sebi

Depository banks have approached Indian regulators and the government for a review of the regulations governing the issue of depository receipts (DRs). They have asked for the introduction of over-the-counter (OTC) DRs or instruments, which would allow foreign investors to invest in Indian equities in their own local markets.

BNY Mellon, a global investment firm that acts as a depository (a holding entity for a security) for more than 2,700 American and global DR programmes, recently held meetings with the finance ministry, Securities and Exchange Board of India (Sebi), and the Reserve Bank of India (RBI) on the possibility of allowing such instruments, according to a statement from the company.

“In permitting OTC non-capital-raising DRs, India would join 67 other countries that provide investors with access in this way, including Brazil, South Korea, South Africa and Turkey,” said BNY Mellon in a statement.

According to sources, two other institutions have also informally approached the regulator with a similar proposal.

The instrument would allow an overseas investor to ask his local broker to purchase shares of a company which can then be converted into DRs. Current regulations do not allow for issuing DRs where there is no capital raising by the company.

Major depository banks have been pressing for the opening up of this route for 20 years or more, said a market source. While a rationale of greater foreign investor comfort with their own markets could have applied earlier, Indian trading and settlement systems are world-class now, the source added, suggesting even lesser rationale for the route in today's times.

According to BNY Mellon officials, this could potentially bring in billions of dollars of additional liquidity to the Indian markets from global funds, which have a specific mandate of investing through depository receipts. The firm noted that nearly half of such funds do not buy shares directly from the market.

Gregory Roath, BNY Mellon’s Asia-Pacific head of depository receipts, said: “We are often asked, especially by US investors, to establish ADR (American depository receipt) programmes for Indian companies, but are restricted from doing so by current regulations. There is significant international demand for Indian equity in the form of DRs that simply cannot be satisfied via the routes now available. Many investors prefer the familiarity and convenience of DRs, are unable to invest directly, or are unable or unwilling to use derivatives.”

Avinash Gupta, senior director and leader (financial advisory), Deloitte India, noted that there are advantages in the home market which would be difficult to beat for DR investors.

“While there could be advantages in some selective situations, factors such as analyst coverage and greater liquidity in India for securities of local firms suggests that there is a better rationale for direct investment rather than through such routes,” he said.
INDIA'S TRYST WITH DEPOSITORY RECEIPTS

• India's first depository receipt (DR) programme for Reliance Industries established in 1992
• Since then 330 companies have created DR programme
• 13 listed on New York Stock Exchange or NASDAQ
• 24 listed on London Stock Exchange
• Remainder used Luxembourg Stock Exchange or Singapore Stock Exchange

^{Source:BNY Mellon}