Global depository receipts (GDRs) as tradable instruments are becoming increasingly popular in the hands of institutional investors worldwide and an accepted option for companies to access global equity markets. India is no exception, and a number of Indian companies have spread their presence to foreign bourses through GDRs and gained access to investment capital overseas.
So why are GDRs so popular? The answer is simple. In essence, GDRs represent an equity-linked financial instrument deriving value from the underlying shares of the issuer company, and a GDR holder can convert his GDRs to receive a proportionate number of shares in the issuer company. GDRs are capable of carrying many attributes of a share; that is, they can have economic rights (including to receive dividends), and if so provided in the GDR arrangements, voting rights in a company. At the same time, GDRs have the advantage of being a security tradeable in a more investor-friendly currency (most GDRs are denominated in dollars, pounds or euros) in possibly a more developed market offering greater liquidity. From the perspective of an institutional investor eyeing the stock of an Indian company, GDRs of such a company would be a natural choice considering, in addition to the aforesaid reasons, that GDRs are exempt from the Indian tax regime (until they are exchanged with the shares of the company).
The process of issuing GDRs by an Indian company typically involves the issuance of its equity shares, denominated in rupees, to an overseas depository bank and the further issuance of GDRs (against the said equity shares) by the depository bank to non-resident investors, in foreign currency. The physical possession of the equity shares is entrusted to a domestic custodian bank, which is an agent of the depository bank.
Illustration: Jayachandran / Mint
As the equity shares are issued to the depository bank, the depository bank is recorded as the registered owner of the equity shares in the books of the Indian company. The GDR holders have the right to exchange the GDRs with the underlying equity shares, and upon the exercise of such right, the GDR holder is registered as the owner of the equity shares of the company. As the depository bank is initially the registered owner of the equity shares, legally, all voting rights attached to the said equity shares are exercisable only by the depository bank. However, typically, GDR issuances are structured in a manner to either require the depository bank to contractually agree to vote on the said equity shares in accordance with the voting instructions of the GDR holder or in accordance with the voting instructions of the board of the issuer company. GDR issuances could also involve the depository bank contractually agreeing to abstain from voting on the underlying equity shares held by the depository bank.
Till 2005, even unlisted Indian companies were permitted to make GDR issuances (subject, of course, to the eligibility criteria and other conditions laid down under the relevant guidelines). However, post-2005, as a consequence of certain amendments made to the relevant guidelines, only listed companies are now permitted to make GDR offerings in markets abroad. Issuer companies have the option to structure their GDR offering as a public issue or as a private placement to a small select group of persons.
GDR issuances have certain pricing and timing benefits under Indian law, which are not available to ordinary preferential allotments made by listed companies.
Ordinary preferential allotments by listed companies are required to be at a minimum price of the preceding six months’ average or two weeks’ average stock price (whichever is higher), calculated with reference to a date which falls 30 days prior to the date of the general meeting of the issuer company authorizing such preferential allotment. Further, an ordinary preferential allotment by a listed company is required to be closed within a period of 15 days from the date of the aforesaid general meeting. Considering that the convening of a general meeting of a listed company requires a minimum notice of three weeks, the 15-day limit for allotment of shares leaves very little flexibility to an issuer company.
In contrast, for a GDR offering, the minimum price prescribed is the two weeks’ average stock price preceding the date of the board meeting of the issuer company wherein the board decides to open the proposed issue. Further, the completion of a GDR issuance, upon receipt of the necessary corporate approvals, is not restricted to any prescribed time period. Accordingly, the board of the issuer company, vis-à-vis a GDR issuance, has been granted that extra elasticity, so it can determine the date of opening of the GDR issuance and freeze the price of the GDR issuance based on the market conditions as a reflection of investor appetite.
Last but not the least, certain kinds of GDRs issuances also enjoy an exemption from the open offer requirements under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, so long as the GDRs acquired are not converted into the underlying equity shares carrying voting rights.
Until 9 November, all GDRs issuances (including those where the GDR holders could give voting instructions on the underlying equity shares to the depository bank) were exempt from the applicability of the open offer obligations. However, following the amendments to the takeover code on 9 November, where the GDR holders are entitled to issue voting instructions to the depository bank, such GDRs are subject to the takeover code.
A number of Indian companies (including Sterlite Industries India Ltd, Tata Steel Ltd, Suzlon Energy Ltd and Tata Power Co. Ltd) have recognized the potential of GDRs as a means of raising foreign direct investment in the past year, and this number can realistically be expected to increase in future.
This column is contributed by Sachin Mehta and Divyata Budhalakoti of AZB & Partners, Advocates & Solicitors. Send your comments to firstname.lastname@example.org