FinMin panel proposes new class of securities 'BhDRs'

A government panel has proposed a new class of securities, 'Bharat Depository Receipts (BhDRs)', for foreign firms to raise money in India -- a move that will provide more choice to domestic investors and make the financial system more competitive.
A BhDR would be a rupee dominated instrument issued by domestic depository against listed equities or other financial assets of a foreign company.
Set up in January, the M S Sahoo panel in its report submitted to the Finance Ministry has suggested reforms in the framework of domestic depository receipts (DRs).
The panel, under the Secretary of Institute of Company Secretaries of India, was set up to review the entire framework of access to domestic and overseas capital markets.

It has suggested that laws and regulations relating to markets and Indian institutional investors must be modified to ensure that there is a level playing field between an Indian security and a DR.
A DR is issued by a bank to represent a foreign company's publicly traded securities. A DR trades on a local stock exchange, but a custodian bank in the foreign country holds the actual shares.

The report said Indian institutional investors must be allowed, enabled and encouraged to reduce their portfolio risk through international diversification including investments in Indian Depository Receipts (IDRs).
Suggesting the new concept, it said that "a complete suite of BhDRs should be allowed to be issued and traded in India to make the Indian financial system more competitive, and to provide greater choice to Indian investors".

The Indian market, it added, should allow trading of DRs issued or listed elsewhere, in addition to BhDRs.
"Both Indian - retail and institutional - as well as foreign investors should be allowed to invest in BhDRs," it said, adding that SEBI should be its sole regulator.
The panel also recommended that "no specific approval should be necessary for issue or creation of BhDRs on the back of foreign securities".
So far, there has been only one issue of IDRs, which was done in 2010 by Standard Chartered Plc.
"This lukewarm response to the IDR policy", the report said "indicates that the governing framework is not in sync with contemporary practices and thinking and, therefore, needs a review to realise the benefits of an active IDR market for Indian investors and the Indian financial system".

Other than IDRs, BhDRs would include other DRs which will be issued on the back of foreign securities that are currently available to listed companies, mutual funds and resident Indians under the extant capital control regime.
These would also include DRs on debt issues, unsponsored issues and non-capital raising equities of a company.