Market regulator SEBI will soon set the ball rolling to give Indian companies increased access to foreign funds through the American Depository Receipts (ADR) and Global Depository Receipts (GDR) route.

It is expected to soon operationalise the liberalised Depository Receipts Scheme that the Centre framed nearly five years back but did not implement due to the concerns raised by the Securities and Exchange Board of India.

Although the liberalised norms for Depository Receipts (DRs) were notified in December 2014, SEBI had opposed their implementation, citing concerns around difficulties in tracking the ultimate beneficiary and the potential for money laundering and unsolicited takeovers.

But now these concerns seem to have been allayed and the decks cleared for the implementation of the liberalised DR scheme, sources said.

Last Friday, Finance Minister Nirmala Sitharaman, as part of a 32-measure package to boost the slowing economy, had said that SEBI is expected to soon act on the implementation of the 2014 scheme.

Before the government came up with the 2014 scheme — which was framed on the basis of a report of a committee headed by MS Sahoo (currently IBBI Chairman) — DR issuances were regulated under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.

What’s new

So how was the liberalised DR scheme framed in 2014 different from the earlier framework? The new framework proposed that Indian companies be allowed to issue DRs in overseas markets against any underlying security, such as bonds, debentures and mutual funds. Currently, they are allowed to issue DRs only against their underlying shares.

The new framework will also pave the way for unsponsored DR, where a depositary bank issues a DR without the involvement, participation or even the consent of the foreign issuer whose stock underlies the DR.

“When the DR scheme was introduced in 2014, it required that various regulators, including the RBI and SEBI, implement it and prescribe regulations for DR issuances. This makes the interplay between regulators essential to the process,” observed Gautham Srinivas, Partner at law firm Khaitan & Co.

“Further, this announcement (by the Finance Minister) is key since SEBI has now seemingly arrived at a position of comfort with DR issuance and the roles and duties of the various participants within this process. Since SEBI has passed orders in the past against entities for manipulation in DR issuances, it will be interesting to see how it proceeds to create a regulatory framework around it. The regulator’s decision to facilitate DR issuances, however, is certainly an excellent move in the right direction,” he added.

What is a depository receipt?

A Depository Receipt is a negotiable (transferable) financial instrument that is traded on a local stock exchange but represents a security, usually in the form of equity, issued by a foreign, publicly listed company. Basically, DRs make it easier to buy shares in foreign companies because the shares of such a company do not have to leave the home state

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