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Home / Market / Stock-market-news /  Sahoo panel bats for liberal regime for Indian depository receipts

New Delhi: Depository receipts (DRs) issued by a foreign company to access the domestic securities market should be treated on par with securities issued by Indian companies within the domestic capital control regime, a committee set up by the finance ministry has suggested.

This is expected to help in developing India’s capital markets and provide more choice to investors to spread their portfolio risk.The government should provide a level playing field between securities issued by Indian and overseas firms, the panel headed by M.S. Sahoo, secretary of the Institute of Company Secretaries of India, said in its report on Indian depository receipts (IDRs).

Capital control regulations should be motivated only by the need to address market failures, the committee said.

IDRs are securities sold in India by a domestic depository on underlying foreign securities.

To protect consumers from a market failure, the committee has designed two levels of IDRs. One level would give access to all Indian investors and require compliance with regulations faced by an Indian issuer of securities that are accessible to all Indian investors.

The other level would have a lower regulatory burden, but give access to sophisticated investors by having 10 lakh market lot. “That is, the smallest unit in which the securities could be issued and traded should be 1 million, which would keep out unsophisticated investors," the report said.

The finance ministry will examine the report by consulting the Reserve Bank of India and capital market regulator Securities and Exchange Board of India, it said in a statement. Under the present framework, there has been only one issue of IDR till date by Standard Chartered Plc in 2010.

“The lukewarm response to the IDR policy indicates that the governing framework is not in sync with contemporary practices and thinking and, therefore, needs a review to realise the benefits of an active IDR market for Indian investors and the Indian financial system," the report said. The committee refers to the set of foreign securities accessible to Indian investors under the capital control regime as Bharat depository receipts.

“The most that can be achieved through reforms in the market for DRs is to create a competitive environment. After this, the outcome actually obtained will depend on the attractiveness of the Indian primary market and secondary market and maturity of investors. If regulations, infrastructure, financial firms and investors are capable, then India will attract issuance and trading of DRs," it said.

The biggest hurdle to IDRs at present are the stringent eligibility norms such as profit requirement, according to Prithvi Haldea, managing director of Prime Database, a market information tracker. “I don’t think compliance is a big issue," said Haldea. “But unless entry norms are liberalized, the IDR market will not take off." The present depository receipt norms prescribe distributable profits in three out of preceding five years. The minimum application amount for Indian investors investing in IDRs is 20,000 for retail investors and is 1 lakh for qualified institutional and non-institutional buyers.

An earlier report submitted by the same committee on reforming the American depository receipts (ADRs) and global depository receipts (GDRs) suggesting a liberal regime by allowing their sale against any underlying security—equity or debt—by any issuer, whether listed or unlisted. Only listed companies have until now been allowed to sell DRs and only against underlying equity shares. Pulling together these reforms, the committee envisages a more competitive landscape for the Indian capital market. “Indian issuers will evaluate whether the ADR/GDR market better serves their interests and global firms will evaluate whether domestic DR issues make sense," the panel said. “This will bring competitive pressure upon the Indian primary and secondary market. This competition will encourage reforms of regulations, drive modernization by infrastructure institutions and financial firms, and result in improved efficiency of the Indian economy."

A vibrant depository receipts market will have one additional positive impact upon the Indian economy through reduction of risk, the report says.

At present, household portfolios and the positions of financial firms suffer from poor diversification by an overemphasis on Indian assets.

“This home bias is likely to decline when global assets are made more visible and more accessible through the domestic DR market. Through this mechanism, the creation of a vibrant domestic DR market would cater to the goal of risk reduction in finance and improve the welfare of households," it said.

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