The author who is a Senior Research Fellow at Shardul Amarchand Mangaldas & Co urges SEBI to fully operationalize the Depository Receipt Scheme, 2014 to give capital freedom to Indian Industries. What is the Depository Receipt? (STATIC-GS3 Economy KEY TERMINOLOGIES) A depository receipt is a negotiable instrument. The local bank of a country issues a depository receipt. The primary purpose of a depository receipt is to enable an already listed company (not compulsory) to raise further capital from international markets. Indian companies use depository receipt (DRs) to access international capital markets. DR issuance involves two steps Indian securities are deposited with a custodian in India; against such deposited securities, DRs are issued by a depository bank in a foreign jurisdiction. Consequently, DRs are foreign securities which are traded and settled off-shore. This arrangement has three major advantages for Indian corporates.

  • First, DRs help Indian companies overcome the home bias problem. Home bias refers to the tendency of foreign investors to disproportionately allocate their funds to their domestic jurisdiction. Consequently, very few Indian companies are able to attract foreign investment. DRs avoid this home bias since foreign investors invest in DRs just like any other security in their home jurisdiction.
  • Second, DRs unlock valuation potential of Indian companies in innovative sectors like technology and e-commerce. Valuation of a business depends on the market analysts’ exposure to comparable businesses. Since international capital markets are more likely to have comparable businesses in innovative sectors, the analysts in those markets are better equipped to unlock the valuation potential of these Indian companies.
  • Third, DRs offer various commercial advantages to Indian companies. An Indian company issuing DRs submits itself to the corporate governance standards of that foreign jurisdiction. This legal bonding helps gain the trust of local customers, government and earn brand recognition in that foreign market.
Evolution of DR in India 1st phase 1993-2013: Issuance of DR started in India during 1993 due to liberalization of the economy. Since liberalization boosted export-oriented services it raised their growth potential which further enabled them to raise equity capital easily. From 1993 to 2013, over 330 Indian companies used DRs to access international capital markets. 2nd phase 2013-till now: In 2013, the Indian Finance Ministry set up the Sahoo Committee to review the 1993 scheme. The Committee recommended liberalizing the 1993 scheme. Then finance minister Jaitley accepted the recommendation and announced a liberalized DR scheme in his maiden budget speech in July 2014. Features of the Liberalized scheme
  • This scheme recognized the principle of competitive neutrality.
  • So, It allowed DRs to be issued on any Indian security in which a non-resident could invest under the Foreign Exchange Management Act, 1999 (FEMA).
  • The scheme also allowed any Indian company, listed or unlisted, private or public, to sponsor DR programs.
  • Indian entrepreneurs were given full freedom to raise capital in India or abroad.
  • The scheme also addressed the risks of market abuse. It allowed DRs to be issued only in permissible jurisdictions which are members of the Financial Action Task Force (FATF) and International Organisation of Securities Commissions (IOSCO).
  • Further, it clarified that market abuse through DRs having any impact in India would be market abuse under Indian laws.
  • On paper, this scheme generously liberalized the overseas listing regime for Indian corporates. But, it was never fully operationalized. This was a major setback for Indian corporates.
  • From 2013 to 2018, only one Indian company raised $185 million on the New York Stock Exchange.
SEBI’s Concern that got delayed the operationalization of the 2013 scheme
  • Though the RBI amended the FEMA regulations to operationalize the scheme SEBI was concerned with the provision of beneficial ownership.
  • Indian law requires every beneficial owner of equity shares holding 10 percent or more of the ultimate beneficial interest in a company to file a declaration with that company.
  • The real challenge was to ensure compliance by foreign holders of DRs on underlying Indian equity shares.
  • Finally, SEBI’s Expert Committee in 2018 solved this issue by stating that the threshold prescribed for beneficial ownership declaration under Indian law is similar to that followed in the permissible jurisdictions for DR issuance.
  • It concluded that beneficial ownership requirements could be met by the information provided by DR investors in the manner prescribed under the laws of the permissible jurisdiction.
Now the path to operationalise the scheme is clear. SEBI needs to take immediate steps to operationalize framework for easing restrictions on raising money abroad. About FATF (Financial Action Task Force) (STATIC_GS2 – International Organisation)
  • The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. An initiative of G7.
  • The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
  • The FATF is, therefore, a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
  • The FATF has developed a series of recommendations that are recognized as the international standard for combating of money laundering and the financing of terrorism and proliferation of weapons of mass destruction
  • First issued in 1990, the FATF Recommendations were revised in 1996, 2001, and 2003 and most recently in 2012 to ensure that they remain up to date and relevant, and they are intended to be of universal application.
  • The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. (Example. Earlier, Pakistan was placed on the grey list by the FATF for failing to curb anti-terror financing)
  • In collaboration with other international stakeholders, the FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.
  • The FATF's decision-making body, the FATF Plenary, meets three times per year.
FATF Members The FATF currently comprises 37 member jurisdictions and 2 regional organizations, representing most major financial centers in all parts of the globe. About IOSCO- International Organization of Securities Commissions (STATIC_GS2 – International Organisation)
  • The International Organization of Securities Commissions (IOSCO) is the international body that brings together the world's securities regulators and is recognized as the global standard-setter for the securities sector.
  • IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation.
  • It works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda.
  • IOSCO was established in 1983. Its membership regulates more than 95% of the world's securities markets in more than 115 jurisdictions; securities regulators in emerging markets account for 75% of its ordinary membership.
  • By providing high-quality technical assistance, education and training, and research to its members and other regulators, IOSCO seeks to build sound global capital markets and a robust global regulatory framework.
IOSCO Objectives
  • To cooperate in developing, implementing and promoting adherence to internationally recognized and consistent standards of regulation, oversight, and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks;
  • To enhance investor protection and promote investor confidence in the integrity of securities markets, through strengthened information exchange and cooperation in enforcement against misconduct and in the supervision of markets and market intermediaries; and
  • To exchange information at both global and regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure and implement appropriate regulation.
Categories of Members There are three categories of members: ordinary, associate and affiliate.
  • In general, the ordinary members (129) are the national securities commissions or similar governmental bodies with significant authority over securities or derivatives markets in their respective jurisdictions.
  • Associate members (31) are usually supranational governmental regulators, subnational government regulators, intergovernmental international organizations and other international standard-setting bodies, as well as other governmental bodies with an appropriate interest in securities regulation.
  • Affiliate members (67) are self-regulatory organizations, securities exchanges, financial market infrastructures, international bodies other than governmental organizations with an appropriate interest in securities regulation, investor protection funds, and compensation funds, and other bodies with an appropriate interest in securities regulation.
Also read: Sucking Up Surplus: SEBI Needs Financial Autonomy To Remain Effective