Easier KYC for foreign funds investing in Indian firms

Mumbai: The government has eased the client-verification requirement under the Prevention of Money Laundering Act for overseas investors who want to put money in the depository receipts of Indian companies. Now, foreign investors do not need to complete any separate KYC (know your client) process as per Indian rules, and can buy depository receipts of Indian companies based on the proof of identity they have established with authorities in their country of origin, said a government notification issued last week.

The decision is expected to make it easier for local companies to raise money overseas, said market experts.

Depository receipts, such as American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), are instruments denominated in foreign currencies.


Indian companies, including ICICI Bank, Infosys, Tata Motors, Wipro and MakeMyTrip, have their depository receipts listed on US stock markets. These are issued by a foreign depository against the shares the companies have deposited with a custodian in India.

“No one has done a depository receipt issue in past five years,” said a senior official with a foreign custodian bank.

The government has now paved the way for fresh issue of depository receipts, said the official with the foreign custodian bank.

Finance minister Nirmala Sitharaman last month said the depository receipts scheme of 2014 would be operationalised soon by the Securities and Exchange Board of India, to enable local companies access foreign funds through ADRs and GDRs. The finance ministry had liberalised the scheme in 2014, when it allowed any Indian company — whether listed or unlisted — to issue depository receipts. It had also allowed the issue of unsponsored depository receipts, which are issued without the specific approval of the issuer of underlying securities.

Sebi had reservations about allowing unsponsored depository receipts as they are transferable and the identity of the overseas holders will not be known. It has yet to issue the guidelines to implement this scheme.

Sandip Bhagat, a partner at law firm S&R Associates, said the amended rule would work well for listing of depository receipts in western markets, but may not make the cut for private placements.

“KYC requirements based on home country requirements is a great idea where the securities are publicly traded, as the regulatory oversight is high for markets involving retail or public investors — for example, the NYSE, the Nasdaq or the London Stock Exchange’s main market,” Bhagat said. “I’m less clear on the KYC and regulatory requirements for privately placed depository receipts in these markets or other markets, and whether they meet the expectation of the government. This isn’t just an issue of listing securities in any FATF (Financial Action Task Force)-compliant country, it is also an issue of the nature of trading market where the security is listed and traded.” Bhagat said he wasn’t sure if unlisted and listed Indian companies would be treated equally, as envisaged under the 2014 scheme. “But at least Indian listed companies and perhaps Indian companies planning simultaneous listings (in India and abroad) can look forward to listing depository receipts outside India in the near future,” he added.