It had expressed concerns about unsponsored DRs and some of the other new proposals during the committee's deliberations
The Securities and Exchange Board of India (Sebi) has told the government that it is not comfortable with unsponsored depository receipts (DRs), according to a report in The Economic Times. This is unusual, to say the least; and is unwarranted. Unsponsored DRs are issued by depository banks without involving the company that has issued the underlying shares. See bit.ly/1Tugf1E.
The finance ministry had followed due process before allowing this new product—it constituted a committee under M.S. Sahoo, with representation from the ministry, Sebi and the central bank, besides other experts. After the committee submitted its recommendations, the ministry invited public comments, before notifying new rules for DR issuances in end-2014. With Sebi questioning the legitimacy of the product now, a pertinent question to ask is if the regulator is barking up the wrong tree.
According to the news report, Sebi’s concern is that since unsponsored DRs are transferable, the identity of the overseas holder won’t be known. It believes the product can potentially be misused for money laundering. Because of a similar worry, Sebi had tightened norms for issuance of participatory notes (P-Notes) last month.
But note that the Sahoo committee had discussed this matter at length. As a result, it recommended a number of safeguards. Unsponsored DRs must be listed on exchanges that offer pre- and post-trade transparency and operate in certain permissible jurisdictions. The gazette notification lists 34 jurisdictions, which are essentially countries that are members of the Financial Action Task Force, or FATF (on money laundering), and whose securities market regulators are members of the International organisation of Securities Commissions (Iosco).
The idea behind this was that policy makers were comfortable with know-your-client (KYC) norms adopted in these permissible jurisdictions. According to a member of the committee who did not want to be identified, “If countries such as the US and UK rely on these KYC norms, why can’t we find comfort in them?"
Neil Atkinson, head of Asia-Pacific depository receipts at the Bank of New York Mellon Corp., says, “Indian issuers have lots of experience issuing debt and equity internationally and some of India’s blue chip companies trade in New York in ADR (American depository receipts) form. There are a number of ways to attempt to establish ultimate beneficial ownership of debt and equity, in the form of ADRs or otherwise through the International Central Securities Depositaries (ICSDs) Euroclear, Clearstream and DTC (Depository Trust Company), which it’s true, can be more challenging than establishing ownership of Indian equity locally."
The committee member cited earlier says that there is an inconsistency with the concerns that are being raised about unsponsored DRs. The concerns, if legitimate, apply equally to sponsored DRs in the new scheme, as well as to the capital-raising DR schemes that had been permitted many years ago. To single out unsponsored DRs, therefore, does make sense. Even though some Indian companies have taken board approval for the issuance of sponsored DRs, they are still awaiting clarity from Sebi for operating guidelines to go ahead with these issuances.
To be fair to Sebi, it had expressed concerns about unsponsored DRs and some of the other new proposals during the committee’s deliberations. S. Ravindran, an executive director at Sebi and a member of the committee, had said that unsponsored issuance of DRs should not be permitted at all because these carry concerns of protection of Indian investors in case of fraud by the issuer and the authorities may be legally handicapped to take action against such an issuer in the absence of authorisation to issue DRs in India.
But the Supreme Court clarified last year that Sebi’s jurisdiction extends to the issuance of depository receipts to foreign investors. This was pertaining to Sebi’s case against Pan Asia Advisors Ltd in the so-called GDR (global depository receipt) scam. As such, if unsponsored or sponsored DR programmes are misused, Sebi can act against investors or intermediaries that are involved. The fact that the government has chosen to work only with jurisdictions that are members of FATF and Iosco should also mean that Sebi can expect help with its investigations.
All told, Sebi appears to be overstating money laundering concerns, especially in the case of unsponsored DRs; more so since the finance ministry itself has vetted and cleared the new product.
In the process, Sebi is making it increasingly difficult for foreign investors who have legitimate reasons for not coming to Indian markets directly.
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