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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

FinMin should move quickly on depository receipt proposals

M.S. Sahoo Committee's recommendations for revamping the regulatory framework for DRs are welcome

Depository receipts (DRs) are an important tool to tackle the problem of home bias in investors’ portfolio decisions. Either because of regulation or choice, most investors favour assets that are available onshore, and DRs help overcome this problem. While India (or should we say bharat) had allowed DR programmes against overseas equity some years ago, and had permitted Indian companies to launch DR programmes overseas over two decades ago, both efforts haven’t produced the best results.

In this backdrop, the M.S. Sahoo Committee’s recommendations for revamping the regulatory framework for DRs are welcome. The committee has recommended exciting new avenues such as non capital-raising DRs and receipts backed by a wide range of securities, other than equity. It has also provided a much needed simplification of taxation rules and other administrative matters.

The Sahoo committee recently submitted its report on domestic DRs, i.e. receipts issued onshore against overseas securities. It has coined a new phrase for domestic DRs—Bharat depository receipts—which include the existing Indian depository receipts and other receipts with a wider range of securities as underlying. Last November, it had submitted its report on DRs issued against Indian securities in overseas markets; although the report was made public only in May.

One of the main features of both reports is that while they work within the existing capital control regime, there is an attempt to remove unnecessary hurdles and allow free flow of capital from foreign investors to the domestic market, and from domestic investors to foreign markets.

DRs allow local investors to buy overseas assets in their own jurisdiction and in their own currency. Even though Indian nationals are allowed to invest $125,000 in overseas assets, this opportunity is hardly availed largely because of the earlier mentioned home bias problem. Thus, it makes sense to widen the scope of DRs and make more opportunities available to investors.

The committee has done well to recommend issuances against debt and other instruments; existing schemes only allow DR programmes to be launched against equity securities. Importantly, it has given a nod to non-capital raising DR programmes, which should lead to a high level of issuer interest.

Currently, Indian companies must raise capital to launch a DR scheme overseas. For a cash-rich company such as, say, Tata Consultancy Services Ltd, this acts as a disincentive to launch a DR. But this also means that it misses out on other benefits that accrue from an overseas issuance, such as increased visibility and a wider investor base. In a non-capital raising DR, a company can initiate a programme with the help of a depository/depository participant, whereby shares are bought from the local market and are converted into DRs.

Even unsponsored DRs have been proposed, where the company isn’t involved at all. Some investors either can’t access overseas assets because of restrictions in their investment mandates (e.g. some pension funds); and some investors don’t want to go through the rigmarole of registering with an overseas regulatory authority to invest. These investors can approach their broker to launch a DR programme with overseas assets as underlying securities. The broker, in turn, will buy these assets from the overseas market and DRs can be issued against them.

The regulations also open up the possibility of investors in Indian companies to initiate a DR programme without the co-operation of the company. This will allow, for instance, some private equity and venture capital firms to cash out when they feel there is in an inordinate delay in going public.

All told, the new regulations provide myriad opportunities to tap overseas capital. Given the fact that apart from top companies, foreign investment in Indian companies is fairly low, the proposed widening of the overseas investor base will be beneficial and should be put in place soon. Since the report on overseas DRs was issued over seven months ago, the government will do well to implement it soon, starting with making necessary changes during the budget session.

The report on domestic DRs has been submitted recently, and it’s likely that the government will take some more time. Even so, considering that most recommendations are keeping in mind the prevailing capital control regime, the government should be able to make a fairly quick decision on implementing them.

As with the Indian Financial Code, the committee has already provided draft regulations for the new DR proposals, making the task all the more easier for the government.

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