Depository receipt norms worry Sebi

Regulator says money-laundering a concern as tracking overseas flows could prove difficult

Securities and Exchange Board of India (Sebi) has flagged money laundering hurdle in the new depository receipt (DR) regime.

The capital market regulator has said that tracking fund flows by companies raising capital overseas may pose difficulties.

According to sources, Sebi, in a recent communication to the finance ministry, has said that it lacks the legal and regulatory framework to effectively monitor funds raised overseas.

“The monitoring compliance of companies raising capital overseas with respect to the Prevention of Money Laundering Act (PMLA) should be left to agencies that have such regulatory powers,” Sebi is said to have told the ministry.

CONCERNS APLENTY

• The Sahoo panel has put the onus of monitoring funds raised abroad by domestic companies on Sebi
• Sebi has said it lacks the legal and regulatory framework to effectively monitor funds raised abroad
• It suggested the ED be given the charge of monitoring funds raised abroad by unlisted companies
• Last year, Sebi had said allowing unlisted companies to go for IPOs abroad could shift the domestic primary market
• In the past, Sebi has cracked down on firms that used funds raised abroad for unauthorised activities

The regulator has also stated that the Securities Act doesn't have specific provisions to track flows raised overseas and to enforce the  requirement of filing of returns.
 
Sebi has suggested to finance ministry that enforcement directorate could be given the charge of monitoring funds raised by unlisted Indian companies in overseas market, a source said.

The market regulator's submission come ahead of a possible notification from the finance ministry of the proposed DR norms recommended by an expert panel led by former Sebi member MS Sahoo.

The committee, which has recommended issue of DRs on a wider range of securities such as debt, mutual funds and exchange traded funds, has essentially put the onus on Sebi of monitoring flows raised overseas by domestic companies.

“In our report, we have recommended liberal framework for depository receipts in-line with international standards as it is the need of the market. Sebi’s contention could be that they lack jurisdiction over unlisted companies,” said Sahoo.

The Sahoo committee report was submitted last year, however, was accepted and made public only earlier this week.
 
“Sebi has limited powers as compared to enforcement directorate to monitor funds. If Sebi is to given the responsibility of monitoring funds raised overseas by unlisted entities then it would require some legislative changes,” said JN Gupta, former executive director, Sebi.
 
This is not the first time  Sebi has expressed displeasure over allowing unlisted companies to access the overseas market.

After the finance ministry had proposed to allow overseas IPOs by unlisted companies, last year, Sebi had immediately raised apprehensions to the idea.

Sebi was wary that the move could export the domestic primary market abroad.

However, even as overseas fund raising by unlisted companies is set to become a reality, Sebi has urged corporates to instead mobilise funds from the domestic market itself.

“We are ready to accommodate the needs for domestic public offering rather than outsourcing to overseas market. If a company markets an issue they are likely to get good valuations here,”said UK Sinha, chairman, Sebi on the sideines of industry body ASSOCHAM's  event today.

Sinha said allowing unlisted companies to list abroad cannot be a permanent measure.

Sebi has been battling with the issue of GDR manipulation. The regulator, in a representation to ministry last year, had stated that extending GDR issuances to unlisted Indian companies will make tackling of GDR manipulation difficult.     
 
In the past, Sebi has cracked down on companies for GDR manipulation. It's investigations have found funds raised overseas were being diverted and being utilized for activities not authorized by shareholders.