ISSUE OF DEPOSITORY RECEIPT

SUBMITTED BY:
Aditya Bhardwaj
B.A., LL.B.(Hons.)
Roll No: 1705
Fourth Year

SUBMITTED TO:
Mrs. Nandita Jha
(Asst. Professor of Law)

RESEARCH PAPER SUBMITTED IN THE PARTIAL FULFILMENT OF THE COURSE

TITLED CORPORATE LAW-I FOR OBTAINING THE DEGREE OF B.A., LL.B. (Hons.)

APRIL 2021

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

NYAYA NAGAR, MITHAPUR, PATNA- 800001

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 ACKOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me during the
writing of this research project.

I wish to express my deep appreciation to my teacher, Mrs. Nandita Jha Assistant Professor
of Law, for her guidance and persistent help without which completing this research would
not be possible.

I would also thank my Institution and my faculty members without whom this project would
have been a distant reality. I also extend my heartfelt thanks to my family, seniors and friends
for their continuous support and advice helping me to complete my project.

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 CONTENTS
ACKOWLEDGEMENT ........................................................................................................................... 2
INTRODUCTION ................................................................................................................................... 4
AIMS AND OBJECTIVES........................................................................................................................ 5
RESEARCH METHODOLOGY ................................................................................................................ 5
HYPOTHESIS ........................................................................................................................................ 5
RESEARCH QUESTIONS........................................................................................................................ 5
LITERATURE REVIEW ........................................................................................................................... 6
CHAPTER-1. ISSUANCE OF DEPOSITORY RECEIPT BY INDIAN COMPANIES ........................................ 7
CHAPTER-2 ELIGIBILITY AND PROCEDURAL REQUIREMENT ............................................................. 10
CHAPTER-3. ROLE OF INTERMEDIARIES ............................................................................................ 14
CHAPTER-4. CONCLUSION................................................................................................................. 16
BIBLIOGRAPHY .................................................................................................................................. 17

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 INTRODUCTION
A Depository receipt is a negotiable certificate issued by a bank representing shares in a
foreign company traded on a local stock exchange. The depository receipt gives investors the
opportunity to hold shares in the equity of foreign countries and gives them an alternative to
trading on an international market.

A depository receipt allows investors to hold shares in stocks of companies listed on

exchange in foreign countries. A depository receipt avoids the need to trade directly with the
stock exchange in the foreign market. Instead, investors transact with a major financial
institution within the country, which typically reduces fees and is far more convenient than
purchasing stocks directly in the foreign market.

In issuing of depository receipt, the issuing company has to necessarily obtain a written
approval from the SEBI. It should be noted that apart from SEBI, the issuing company is also
required to mandatorily obtain the necessary approval from the analogous body from the
country of its incorporation under the relevant laws to issue the depository receipt.

The Securities and Exchange Board of India (SEBI) has introduced a framework for issuance
of depository receipts (DRs) by companies listed or to be listed in India ( DR Framework),
by its circular dated October 10, 2019.

In the early years of liberalisation and up to the time SEBI permitted qualified institutions
placement (QIPs) in 2006, DR issuances formed a significant and important part of foreign
investment into the Indian equity markets. However, in the past five years, there have been
very few DR issuances, for a variety of reasons including due to regulatory uncertainty
around operational guidelines for DRs and concerns in relation to compliance with rules
under the anti-money laundering legislation.

DR issuances allow companies to access alternative and larger pools of capital including
industry-specific investor classes that have institutional sectoral expertise, as well as investors
that have higher ability to take risk. This, in turn, could provide better valuations for
companies as well as benefit shareholders looking for exits. DR issuances also increase
visibility of Indian companies in the international markets.

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The DR Framework has the potential to reopen this avenue of investment into India and for
Indian companies and their shareholders to access the international capital markets.

AIMS AND OBJECTIVES

1. Explain the functioning and the implication of issue of depository receipt in the
capital market.
2. Determine the market intermediaries involved in issuance process.

3. To give an overview on the laws relating to Indian depository receipt.

4. Deal about the procedural requirements and eligibility criteria for the issuer company
in order to issue IDR.

RESEARCH METHODOLOGY
This project is based on written text material. It is based on the doctrinal method of research.
The segments are structured and written actively. The writing style is descriptive as well as
analytical.

HYPOTHESIS
• the issuance of depository receipt is beneficial for the investor as well as issuing
company both as it allows investors to invest in foreign companies and it helps the
companies to have investors globally.
• It is also beneficial for the global market as it helps in the accessibility of investors in
companies all around the globe.

RESEARCH QUESTIONS
• What is the procedure for issue of depository receipt?
• What are the market implications of depository receipt?
• What is the eligibility criteria for issue of depository receipt?
• Which are the intermediaries involved in the entire procedure of depository receipt?]
• What are the advantages and disadvantages of depository receipt?

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 LITERATURE REVIEW
Depository receipt are a major source of funding for any company from foreign investors.
Issuance of depository receipt provides access to foreign funds. According to SEBI, listed
firms are allowed to issue such securities or debts provided their promoters, directors and
selling shareholders are not barred from the capital markets. SEBI said that these restrictions
would not apply to the entities who were debarred in the past by the market regulator and the
said debarment is already over as on the date of filing of the document.

Listed company shall ensure that the aggregate of permissible securities which may be issued
or transferred for the purpose of issue of DRs, along with permissible securities already held
by persons resident outside India, shall not exceed the limit on foreign holding of such
permissible securities under the applicable regulations of FEMA.

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 CHAPTER-1. ISSUANCE OF DEPOSITORY RECEIPT BY
INDIAN COMPANIES
The Securities and Exchange Board of India (SEBI) has introduced a framework for issuance
of depository receipts (DRs) by companies listed or to be listed in India ( DR Framework),
by its circular dated October 10, 2019.
In the early years of liberalisation and up to the time SEBI permitted qualified institutions
placement (QIPs) in 2006, DR issuances formed a significant and important part of foreign
investment into the Indian equity markets. However, in the past five years, there have been
very few DR issuances, for a variety of reasons including due to regulatory uncertainty
around operational guidelines for DRs and concerns in relation to compliance with rules
under the anti-money laundering legislation.
DR issuances allow companies to access alternative and larger pools of capital including
industry-specific investor classes that have institutional sectoral expertise, as well as investors
that have higher ability to take risk. This, in turn, could provide better valuations for
companies as well as benefit shareholders looking for exits. DR issuances also increase
visibility of Indian companies in the international markets.
The DR Framework has the potential to reopen this avenue of investment into India and for
Indian companies and their shareholders to access the international capital markets.
The DR Framework
The DR Framework sets out requirements for DR issuances in addition to requirements
under the Companies Act, 2013 and the rules thereunder, the Depository Receipts Scheme,
2014 (2014 Scheme) and the foreign exchange regulations. The Central Government will
separately notify permissible jurisdictions for DR issuances and SEBI will also specify the
international exchanges in such jurisdictions and DRs can be issued under the DR Framework
after these notifications.
Only listed companies are permitted to issue DRs on the back of equity shares or debt
securities listed in India. Companies undertaking a domestic initial public offering (IPO) are
also permitted to simultaneously set up a DR programme (subject to successful completion of
the IPO). The DR Framework also permits existing shareholders to exit by way of a DR
issuance. Where the initial listing of DRs includes such secondary sales, the issuer is required
to provide an opportunity to all its shareholders to tender their shares to participate in such
DR issuance. Customary eligibility requirements apply including the listed company being in
compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations,

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2015 and the listed company and associated persons (such as the promoter), not triggering
regulatory prohibitions such as being debarred from accessing capital markets.
The Framework has introduced certain new requirements. For example, the DR offer
document must now be filed by an intermediary with the SEBI and the stock exchanges for
their review at the time of initial listing of DRs. Whilst SEBI and the stock exchanges are to
provide comments within prescribed timelines. Issuers may need to factor in the time for such
review into their issue timelines. Further, Indian residents and non-resident Indians (NRIs),
are not permitted to be permissible holders or their beneficial owners, with the onus of
ensuring compliance with this condition being on the permissible holder (including its
beneficial owner)
The Framework has also modified certain existing requirements. For example, whilst DR
issuances have always been subject to foreign investment limits, the Framework now requires
shareholders to adopt limits up to which DRs can be issued (both primary and secondary) and
further specifies that the listed company should comply with minimum public shareholding
norms in India, after excluding the permissible securities held by the depository. Further, the
minimum price for issue or transfer of securities is the price applicable to the corresponding
mode of issue to domestic investors (earlier listed companies could price based on QIP
pricing i.e., average of weekly high and low prices of the underlying shares for two weeks).
Additionally, management proxies are not permitted under the DR Framework and
depositories must exercise voting rights, if any, only pursuant to instruction from the DR
holder.
The DR Framework also provides for SEBI’s power to issue clarifications and exemptions,
which would be useful for issuers, particularly for the first few issuances under the DR
Framework.
The recent amendment to Prevention of Money-laundering (Maintenance of Records) Rules,
2005 (PMLR Amendment), has clarified certain long-standing issues for DRs. Earlier,
compliance with provisions regarding beneficial ownership in respect of DR holders under
the rules, had been a cause for concern. The PMLR Amendment has eased reporting and due
diligence requirements and has clarified, among other things, that rules in relation to the
identification and verification of the beneficial owner of DR holders, who are residents of
certain jurisdictions to be notified by the Central Government, would be as per the norms of
such jurisdiction

Considerations under the DR Framework

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Whilst the DR Framework has paved the way for the issue of DRs, issuers will need to
evaluate certain matters with their advisors including the following:
Pricing: Standalone DR issuances are to be priced based on the corresponding mode of issue
to domestic investors. Given that the SEBI has prescribed different pricing formula for
primary issuances based on the types of offerings (preferential issue, QIP and public
offerings), discussions with the regulator may be required to identify the price that would
apply for a particular DR issuance. Further, pricing for secondary transfers (by residents or
non-residents), may also need analysis, both for an initial listing and on an ongoing basis.
Accordingly, simultaneous issuances could be a structuring alternative for both pricing clarity
and to increase headroom for DRs.
Fungibility: Whilst fungibility is permitted under the DR Framework subject to the limits set
out above, listed companies may need to devise a procedure to make it operational. Further,
pricing implications under the DR Framework are required to be evaluated.
Secondary transfers: Certain matters to be considered in relation to secondary transfers
include mode of transfer by the shareholder of the listed company to the depository (on
market or off market), pricing and tax implications for the seller and the acquirer.
Existing DR programs: Whilst the DR Framework is applicable only to DR issuances by
listed companies after October 10, 2019 and the relevant jurisdictions and stock exchanges
have not been notified yet, existing programs should consider complying with the terms of
the DR Framework such as obtaining shareholders’ approval for DR headroom to permit
fungibility. Additionally, DR issuances pursuant to stock options to NRIs and status of
existing resident and NRI holders in the programs will also require analysis. Existing
programs must also evaluate their DR voting structure for compliance with the DR
Framework, before undertaking further issuances.
Although there are some points that require further discussion, SEBI has taken a step in the
right direction by issuing the much-awaited DR Framework. Listed companies in India will
now be able to consider DRs as a viable option for raising capital or to provide an exit to
existing shareholders. Whilst a framework for DR issuances by unlisted companies is awaited
(the Ministry of Corporate Affairs would perhaps have to take a lead here), the simultaneous
IPO and DR issuance route provided under the DR Framework would allow unlisted
companies including technology focussed companies, to access specific investor groups
outside India and provide a potential structuring option.

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 CHAPTER-2 ELIGIBILITY AND PROCEDURAL
REQUIREMENT
Under the SEBI DR Circular, 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. This is
stricter than the eligibility criteria prescribed under the MoF Scheme. For example, the
debarment test is only applicable to issuers and selling shareholders under the MoF Scheme,
compared to the wider net of individuals and entities covered under the SEBI DR Circular.

Further, the eligibility conditions in case of fast track rights issues and public offers provide
for a look back period of three years and exclude imposition of monetary fines by stock
exchanges, while seeking compliance with SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 (the “LODR”).

However, similar concessions have not been provided in the eligibility conditions prescribed
under the SEBI DR Circular.

Compliance with Minimum Public Shareholding (“MPS”) norms

As an eligibility condition, a listed issuer proposing to issue DRs should be in compliance

with the LODR in relation to the MPS requirement of 25% of the post issue capital, as given
under the Securities Contract Regulation Rules, 1957 (the “SCRR”). Under the SEBI DR
Circular, DRs are excluded from computing towards public shareholding, a departure from
the MoF Scheme and the SCRR, where DRs were included. This could pose a significant
challenge for companies intending to list DRs through fresh issue or DRs through secondary
sale by non-promoter group, which could lead to higher than expected dilution to public by
an issuer. Further, it needs to be seen if stock exchanges are agreeable to issuing in- principle
approvals to issuers who have made a public offer of only 10% of the post issue capital to
public (in accordance with SCRR) and are yet to increase it to the mandatory 25% of the post
issue capital.

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DR issuances

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.2 In case of issue and listing of DRs pursuant to transfer by existing holders, the issuer
must provide an option to all existing security holders to take part in the process by tendering
their securities – however, no procedure has been laid out under the SEBI DR Circular.

Further, an unsponsored DR as per the MoF Scheme is a program where DRs are issued
without specific approval of the issuer. Thus, unsponsored DRs provide an additional avenue
for investors on the back on underlying securities by creating a market for them overseas.
However, the SEBI DR Circular has removed such flexibility.

Identification of beneficial owner

A permissible holder of a DR includes a beneficial owner, who is neither a person resident in

India nor an NRI. Identification of beneficial owner will now be governed by the norms of
the jurisdiction where the DRs will be listed, i.e. a foreign investor can acquire a DR based on
the KYC checks it has undergone with the notified international exchange. However, the
identification of beneficial owners under the Companies Act stands at a different ground
when compared with the identification pursuant to the Amendment. To that extent, policy
alignment is still a much-needed request.

Simultaneous listing outside and within India

The SEBI DR Circular 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.

This may, however, pose a challenge in case of a secondary DR issue with respect to the pre-
IPO shares locked in under the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018 (the “ICDR Regulations”). Also, in case of
further issue of permissible securities for issue of DRs, the capital structure of the issuer will

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remain fluid, which will require obtaining necessary clearance from SEBI both in terms of
disclosures as well as restriction on further issue of capital under the ICDR Regulations.

Filing of offer documents for DRs

For issue of DRs, the preliminary offer document needs to be filed with SEBI and the Indian
stock exchanges for their comments, along with filing of the final offer documents. This is in
contrast to the MoF Scheme, which mandated mere filing of the offer documents with SEBI.
Additional review requirements imposed under the SEBI DR Circular seems to be acting as
an excessive legislation impacting the timelines for launch. Filing of offer document seems to
be a varied practice when compared to the external commercial borrowings raised by an
issuer through international capital markets, and foreign currency convertible bonds.

Disclosures on Indian stock exchange

All public disclosures made on the international exchange to comply with the norms of the
permissible jurisdiction where the DRs will be listed, are also required to be filed on the
Indian stock exchange, as per the SEBI DR Circular.

Voting Rights

While all DR holders are allowed to vote through foreign depository, the discretion provided
to foreign depository under the MoF Scheme to vote on such matters (irrespective of
instructions received from DR holders) has been taken away under the SEBI DR Circular.
This seems to be a step in the right direction, as it helps to prevent the foreign depository to
vote on the instructions of the promoters, or management of an issuer.

Pricing

Under the SEBI DR Circular, 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. With lack of clarity on what would constitute a
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corresponding mode of issue, it could affect the manner in which the pricing occurs,
especially in case of issue of DRs from existing security holders.

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 CHAPTER-3. ROLE OF INTERMEDIARIES
It is quite evident from the above discussion that issue of IDRs involves international
collaboration, which makes it a process which is loaded with intermediaries and different
market players. These intermediaries are recognized by the participating countries and in turn
essential to complete the process of issue of IDRs. Fundamentally, there are essentially four
intermediaries involved in this process. These are Issuer Company, Overseas Custodian
Bank, Domestic Depository and Merchant Banker.

Quite naturally the ‘Issuer Company’ is the foreign company which intends to raise money
through issue of IDRs1. For instance, companies which are known in Indian as much they are
known all over the world, like Google, Facebook, Starbuck etc., recognize the Indian stock
market as the potential hub in order to raise funds. Essentially, these are the companies which
play the role of Issuer Company in order to issue IDRs. Regarding the foreign companies
(issuer companies), it should always be kept in mind that they should be listed in its country
incorporation or where there registered office is situated2.

The second intermediary is an ‘Overseas Custodian Bank’. It is a banking company which is

established in a country outside India and has a place of business in India and acts as
custodian for the equity shares of issuing company, against which IDRs are proposed to be
issued by having a custodial arrangement or agreement with the Domestic Depository or by
establishing a place of business in India3. Essentially these banks are appointed by the
domestic depository which then acts as the safety valves for the foreign investor (Indian
investors) of the countries, assuring them the authenticity of the company and its shares.
These banks are the holder of equity shares on behalf of the Domestic depository4.

The third and the most important intermediary in the entire process of raising funds via IDRs
is ‘Domestic Depository’. A domestic depository is an intermediary institution that helps the
foreign companies to raise funds from Indian market via IDRs. It is an Indian entity
appointed by the issues company and registered as a custodian of securities registered with
the Securities and Exchange Board of India and authorized by the issuing company to issue

1
Manoj Kumar, Advent Of Indian Depositary Receipts, BSE The Stock Exchange Review (April 2014) 4
2
Sharma, Gaurav, Understanding the Indian Legal Regime Regulating Indian Depository Receipts (IDR’s)
(September 9, 2012). Available at SSRN: http://ssrn.com/abstract=2143874 or
http://dx.doi.org/10.2139/ssrn.2143874
3
Explanation iii, Rule 13
4
Moneybol, Indian Depository Receipts (IDRs) Explained , June 01 2010 , available at
http://moneybol.com/indian-depository-receipts-idrs-explained/ (Last visited on March 27, 2021).

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IDRs5. It acts as a trustee on behalf of the IDR holder by issuing IDRs representing
underlying equity shares of the issuer company. It should also be kept in mind that the
obligations and the legal rights of the domestic depository is usually specified in the deposit
agreement signed between the issuer company and the domestic depository6. It also bears the
rights and obligations of the IDR holders. It is this reason that the deposit agreement is
recognized as one of the most important document during the issue of IDRs7.

The last intermediary in the entire process is the ‘Merchant Banker’. He is defined in sub-
regulation (cb) of regulation 2 of the Securities and Exchange Board (Merchant Bankers)
Regulations, 19928. As per the regulation, a merchant banker means any person who is
engaged in the business of issue management either by making arrangements regarding
selling, buying or subscribing to securities or acting as manager, consultant, adviser or
rendering corporate advisory service in relation to such issue management9. He is the person
who is responsible for due diligence and it is through him from where the draft prospectus for
issuance of the IDR is filed with SEBI by the issuer company.

5
Explaination ii, Rule 13
6
Supra note 7
7
Supra note 7
8
Supra note 15, 13.2.explanation ii
9
sub-regulation (cb) of regulation 2 of the Securities and Exchange Board (Merchant Bankers) Regulations,
1992.

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 CHAPTER-4. CONCLUSION
Overall, the SEBI DR Circular is a welcome step by SEBI to operationalize the MoF Scheme
for listed and to be listed companies. In addition, the amendment provides clarity on
beneficial ownership which was a longstanding roadblock until now. However, the SEBI DR
Circular, in its current state, still requires certain modifications to offer DRs as a lucrative
fund-raising option. Clarity in relation to the fungibility of DRs is still awaited and will be
reviewed with much interest, given the lessons learnt with the fungibility of IDRs in the past.
However, a major roadblock for the complete operationalization of the MoF Scheme is a
framework for unlisted companies, constituting a majority of active fund seekers (esp. start-
ups) who are now eagerly waiting to tap this route, the regulatory framework by the Ministry
of Corporate Affairs for which is awaited.

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 BIBLIOGRAPHY
PRIMARY DATA
Statutes:
1. Companies Act, 2013.
2. Companies (Registration of foreign Companies) Rules, 2014
3. Companies (Issue Of Indian Depository Receipts) Rules, 2004
4. Depository Receipt Scheme, 2014

SECONDARY DATA
Books and Journal

• Avtar Singh, “ Company Law”(Eastern Book Company, Luknow 2015).

Web Sources
• https://www.conventuslaw.com/report/india-depository-receipts-issuances-analysis-
of/
• https://corporate.cyrilamarchandblogs.com/2019/10/sebi-introduces-framework-for-
issuance-of-depository-receipts/
• https://taxguru.in/rbi/issue-indian-depository-receipts-overview.html

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