New Sebi framework to boost depository receipt issuances

In a move that may benefit Indian companies as well as foreign investors, regulator Sebi has issued a new framework for issue of depository receipts for greater exposure to world markets for raising capital and enhancing their shareholder base.

DRs are foreign currency denominated instruments, issued by a foreign depository backed by securities of an issuer, issued or transferred to a domestic custodian and are listed on an international exchange. These can get listed on international exchanges in permissible jurisdictions.

Experts believe that issuing DRs has the added benefit of increasing the share's liquidity while boosting the company's prestige on its local market.

Depository receipts encourage an international shareholder base and provide easier opportunity to foreign investors to gain the benefits of diversification while trading in their own market under familiar settlement and clearance conditions.

On October 10, the Securities and Exchange Board of India laid down a framework for the issue of depository receipts (DRs) by listed companies and to be listed companies in order to provide increased access to foreign funds. Subsequently, on November 28, a list of permissible jurisdictions and international exchanges has also been prescribed.

These exchanges are NYSE and Nasdaq in the US, Tokyo Stock Exchange in Japan, Korea Exchange Inc in South Korea, London Stock Exchange in the UK, Euronext Paris in France, Frankfurt Stock Exchange in Germany, Toronto Stock Exchange in Canada, as also the India International Exchange and the NSE International Exchange at the International Financial Services Centre in India.

Under Sebi norms, any issuers, its promoters, promoter group, directors and selling shareholders who are debarred from accessing capital markets and declared as willful defaulters or fugitive economic offender are ineligible to undertake a DR issue.

The issue of DRs can be offered through fresh issue or through transfer by existing security holders, as long as it complies with the foreign investment limits imposed under the FEMA rules.

The Sebi circular further permits simultaneous listing of DRs and permissible securities on Indian stock exchanges wherein the issue or transfer of the DRs can only happen after trading approval has been received from the Indian stock exchange for a public offer.

Issuer need to comply with all public disclosures norms of the permissible jurisdiction where the DRs will be listed, in addition, these disclosures are also required to be filed on an Indian stock exchange.

The price of issue of DRs should not be less than the price for the public offer/ preferential allotment/ QIP that has been made to the domestic investors. In case permissible securities are transferred for the issue of DRs, the same should be issued at a price not less than the price of a corresponding mode of issue of permissible securities to domestic investors under the applicable laws.