Government looking to notify Liberal Depository Receipt scheme

NEW DELHI: Private equity investors would be able to encash their holdings in Indian companies on foreign bourses with the government looking to notify a new liberal depository receipt scheme.

The scheme, based on the recommendations of a panel headed by MS Sahoo, former Sebi member and secretary of the Institute of Companies Secretaries of India, would also allow overseas issuances of depository receipts with underlying debt by listed as well as unlisted entities.

Depository receipts can be issued both for raising capital through new shares or against existing or secondary shares, and the issuance may be either sponsored or unsponsored.

A finance ministry statement said on Friday that depository receipts will count as public shareholding if they have attached voting rights for holders “Detailed consultations were held on the report with all relevant agencies or departments and thereafter it has been decided by the government to accept the report submitted by the committee,” the statement said. “The new scheme suggested by the committee would be notified at a later stage after the necessary tax-related amendments are notified.”

At present, depository markets can only be accessed through equity as the underlying instrument. Under the new regime, corporate debt, government debt and other instruments could also be used as underlying asset to raise funds overseas.

The government is also looking to allow level-1, level-2 and unsponsored ADRs, which are less regulated and easier to access markets. A few months ago, government had allowed unlisted companies to list overseas as part of a capital markets liberalisation plan and allowing access to all categories of instruments is a logical culmination of this process.

In an unsponsored ADR, any shareholder without the backing of the company management will be able to sell his equity to a depository, who will then issue receipts in lieu to those interested.

Level-I ADR is the most liberal form of a depository receipt that allows a non-US firm to test the US equity markets with minimal reporting requirements from that country’s Securities and Exchange Commission (SEC).

In a sponsored level-1 offering, a company aggregates the shares held by local investors, who may want to sell their holding and offer them to the US market through American depository receipts. The proceeds of the ADRs go to the investors, but the company gets to test the appetite for its shares in the US, allowing it to raise fresh equity there through a level-3 offering later.

India currently allows only level-3 ADRs, which involve capital raising and listing on regular exchanges and greater disclosures, including costly compliance with the US laws. Allowing level-1 and level-2 access will make the market more attractive for Indian companies.