A Depository Receipt (DR) is a financial instrument representing certain securities (eg. shares, bonds etc.) issued by a company/entity in a foreign jurisdiction. Securities of a firm are deposited with a domestic custodian in the firm’s domestic jurisdiction, and a corresponding “depository receipt” is issued abroad, which can be purchased by foreign investors. DR is a negotiable security (which means an instrument transferrable by mere delivery or by endorsement and delivery) that can be traded on the stock exchange, if so desired.
DRs constitute an important mechanism through which issuers can raise funds outside their home jurisdiction. DRs are issued for tapping foreign investors who otherwise may not be able to participate directly in the domestic market. It is perceived as the beginning point of connecting with the foreign investors (i.e. a stage before the actual listing the shares /securities in a foreign stock exchange) or a way of introducing the company to a foreign investor. For investors, depository receipt is a way of diversifying the risk, by getting exposure to a foreign market, but without the exchange rate risk as they are foreign currency denominated. Further, they feel more safe to invest from their home location.
Depending on the location in which these receipts are issued they are called as ADRs or American Depository Receipts (if they are issued in USA on the basis of the shares/securities of the domestic (say Indian) company), IDR or Indian Depository Receipts (if they are issued in India on the basis of the shares/securities of the foreign company; Standard Chartered issued the first IDR in India) or in general as GDR or Global Depository Receipt.
Thus, ADR or GDR are issued outside India by a foreign depository on the back of an Indian security deposited with a domestic Indian custodian in India (means a custodian or keeper of securities- an Indian depository, a depository participant, or a bank- and having permission from the securities market regulator, SEBI, to provide services as custodian).
Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) (Seventeenth Amendment) Regulations, 2014 and as per the Scheme issued in this regard by the Ministry of Finance in December 2014, a depository receipt is defined as follows:
‘Depository Receipt’ means a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of eligible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in section 2(44) of the Companies Act, 2013.”
As per the Companies Act, 2013 "Global Depository receipt" means any instrument in the form of a depository receipt created by a foreign depository outside India and authorised by a company making an issue of such depository receipts while the "Indian Depository Receipt” means any instrument in the form of a depository receipt created by a domestic depository in India and authorised by a company incorporated outside India;
In India any company - whether private limited or public limited or listed or unlisted - can issue DRs. However listed DRs enjoy some tax benefits.
ADR /GDR issues based on shares of a company are considered as part of Foreign Direct Investment (FDI) in India, though it is an indirect way of holding shares. As per a Cabinet decision dated 16 July 2015, DRs having underlying of instruments which can be issued under Schedule 5 of FEMA Regulations, being in the nature of debt, will not be treated as foreign investment. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement will be reckoned as foreign investment.
Types of DRs
DRs are generally classiﬁed as under:
- Sponsored: Where the Indian issuer enters into a formal agreement with the foreign depository for creation or issue of DRs. A sponsored DR issue can be further classiﬁed as:
- Capital Raising: The issuer issues new securities which are deposited with a domestic custodian. The foreign depository then creates DRs abroad for sale to foreign investors. This constitutes a capital raising exercise, as the proceeds of the sale of DRs go to the Indian issuer.
- Non-Capital Raising: In a non-capital raising issue, no fresh underlying securities are issued. Rather, the issuer gets holders of its existing securities to deposit these securities with a domestic custodian, so that DRs can be issued abroad by the foreign depository. This is not a capital raising exercise for the Indian issuer, as the proceeds from the sale of the DRs go to the holders of the underlying securities.
- Unsponsored: Unsponsored DRs are where there is no formal agreement between the foreign depository and the Indian issuer. Any person other than the Indian issuer may, without any involvement of the issuer, deposit the securities with a domestic custodian in India. A foreign depository then issues DRs abroad on the back of such deposited securities. This is not a capital raising exercise for the Indian issuer, as the proceeds from the sale of the DRs go to the holders of the underlying securities.
Based on whether a DR is traded in an organised market or in the over the counter (OTC) market, the DRs can be classiﬁed as listed or unlisted.
- Listed: Listed DRs are traded on organised exchanges. The most common example of this are American Depository Receipts (ADRs) which are traded on the New York Stock Exchange (NYSE).
- Unlisted: Unlisted DRs are traded over the counter (OTC) between parties. Such DRs are not listed on any formal exchange.
The most common DR programs internationally are:
- ADRs: DRs issued in United States of America (US) by foreign ﬁrms are usually referred to as ADRs. These are further classiﬁed based on the detailed rules under the US securities laws. The classiﬁcation is based on applicable disclosure norms and consists of:
- Level 1: These programs establish a trading presence in the US but cannot be used for capital raising. They may only be traded on OTC markets, and can be unsponsored.
- Level 2: These programs establish a trading presence on a national securities exchange in the US but cannot be used for capital raising.
- Level 3: These programs can not only establish a trading presence on a national securities exchange in the US but also help raise capital for the foreign issuer.
- Rule 144A: This involves sale of securities by a non-US issuer only to Qualiﬁed Institutional Buyers (QIBs) in the US.
- Global Depository Receipts (GDRs): GDR is a collective term for DRs issued in non-US jurisdictions and includes the DRs traded in London, Luxembourg, Hong Kong, Singapore.
Regulatory Regime for Depository Receipts in India
In India, the issue of Depository receipts were regulated by the “The Issue of Foreign Currency Convertible Bonds and Ordinary Share (through Depository Receipt Mechanism) Scheme 1993 issued by the Ministry of Finance. The 1993 Scheme was formulated at a time when India’s capital markets were substantially closed to foreign capital and the domestic financial system was not well developed. In the last two decades, the equity market has developed sophisticated market infrastructure with active participation by both domestic and foreign investors and capital controls have been eased substantially. In this period many aspects of the Indian legal and regulatory system have evolved with substantial changes. These developments warranted a fresh look at the Scheme governing the issue of Depository Receipts (DRs). Accordingly, based on the recommendations of the MS Sahoo committee, Hon’ble Finance Minister had announced in the 2014-15 Budget Speech that he propose to “Liberalize the ADR/GDR regime to allow issuance of depository receipts on all permissible securities”. Accordingly “The Depository Receipts Scheme, 2014" was formulated and implemented from December 15, 2014.
Detailed comparison of the 1993 Scheme and the 2014 scheme
|Sl. No.||Parameter||1993 Scheme||2014 Scheme|
|1||Approval for issue of DRs from authorities||Required from MoF||Not required|
|2||Issuer of DRs (foreign depository)||A bank authorized by issuer of underlying securities||A regulated person having legal capacity to issue DRs|
|3||Custodian of DRs (domestic custodian)||A bank which acts as a custodian||A regulated entity having legal capacity to act as custodian for underlying securities|
|4||Jurisdictions for issue of DRs||Anywhere for listed companies; FATF/ IOSCO jurisdiction for unlisted companies||FATF and IOSCO compliant jurisdictions|
|5||Purpose of issue of DRs||Capital raising and non-capital raising||No change|
|6||Quantity / Limit on issue of DRs||No limit||No change|
|7||Kind of issue of DRs||Sponsored||Both sponsored and unsponsored|
|8||Mode of issue of DRs||Public offer, private placement or any other manner prevalent||No change|
|9||Listing of DRs||Not required||No change|
|10||End Use||Restricted||No restriction|
|11||Securities underlying DRs||Equity shares and FCCB||Any securities which are available to persons resident outside India and in demat form|
|12||Subscribers of DRs||Any person||No change|
|13||Mode of issue of underlying shares||Any mode permissible under law||No change|
|14||Mode of transfer of underlying securities to foreign depository||Not applicable||On Exchange, Off Exchange and tender process|
|15||Pricing of underlying securities at issue||Listed shares as per SEBI rules; Unlisted shares as per discounted cash ﬂow method||Listed shares as per SEBI rules; No restriction on other securities|
|16||Issuer of underlying securities||Any company- listed or unlisted||Any issuer - listed or unlisted|
|17||Whether underlying shares form part public holding||No||Yes subject to certain conditions|
|18||Conversion from underlying securities to DRs and vice versa||Permissible||No change|
|19||Voting rights associated with underlying securities||Foreign depository||No change|
|20||Obligations||No explicit provision||Custodian, depository, issuer and transferor of underlying securities, holders of DRs|
|21||Market Abuse||No explicit provision||To be dealt by SEBI|
|22||Oversight on Prevention on money laundering||FIU, Enforcement Directorate and SEBI||No change|
M.S. Sahoo. (November 2013). Report of the Committee to Review the FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993. New Delhi: Ministry of Finance, Government of India.