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ADR/GDR

Posted September 10, 2014 by aiateam

An Indian corporate can raise foreign currency resources abroad through the issue of

American Depository Receipts (“ADRs”) or Global Depository Receipts (“GDRs”). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its rupee denominated shares to a person resident outside India being a depository for the purpose of issuing GDRs and/ or ADRs, subject to the condition that:

  • the ADRS/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time,/
  • the Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible lo issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance,and
  • the Indian company issuing such shares is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.

The instruments are issued by a Depository abroad and listed in the overseas stock exchanges like NASDAQ. The proceeds so raised have to be kept abroad till actually required in India. There are no end use restrictions except for a ban on deployment/ investment of these funds in real estate and the stock market. There is no limit up to which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.

The ADR/GDR can be issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager of the issue. The Indian company will issue its rupee denominated shares in the name of the Overseas Depository and will keep it in he custody of the domestic Custodian in India. On the basis of the ratio worked out and the rupee shares kept with the domestic Custodian, the Depository will issue ADRs/GDRs abroad.

Investments by Venture Capital Funds

A SEBI registered Foreign Venture Capital Investor (FVCI) can invest in Indian Venture Capital Undertaking (“IVCU”) or in a Venture Capital Fund (“VCF”) or in a Scheme floated by such VCFs subject to the condition that the VCF and IVCU should also be registered with SEBI. They can purchase equity/equity linked instruments/ debt/debt instruments, debentures of an IVCU or of a VCF through initial public offer

Or private placement or in units of schemes/ funds set up by a VCF. RBI, on application, may permit a FVCI to open a foreign currency account or rupee account with a designated branch of an authorized dealer. The purchase/ sale of shares, debentures, and units can be at a price that is mutually acceptable to the buyer and the seller /issuer. Authorized dealers (that is, banks) are also authorized to offer forward cover to FVCIs to the extent of total inward remittance net of investments liquidated.

Transfer of shares and convertible debentures – Nonresident to Resident/Resident to Non Resident

General permission has been granted to non-residents for transfer of shares and convertible debentures of an Indian company as under:

  • A person resident outside India (other than non resident Indian and overseas corporate body) may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India (including non resident Indians); provided transferee has obtained prior permission of SIA/FIPB to acquire the shares if he has previous venture or tie-up in India rough investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged.
  • Non resident Indian and overseas corporate body may transfer by way of sale or gift the shares or convertible debentures held by him or it to another non-resident Indian; provided transferee has obtained prior permission of Central Government to acquire the shares if he has previous venture or tie-up in India through investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged.
  • The person resident outside India may transfer any security to a person resident in India by way of gift.
  • A person resident outside India may sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a registered broker.

Recently, the Government has dispensed with the requirement of obtaining the prior approval of the FIPB in respect of transfer of shares/convertible debentures, by way of sale, from residents to non-residents (including transfer of subscriber’s shares) of an Indian company in sectors other than financial service sector (i.e. banks, non-banking financial companies and insurance) provided that the activities of the investee company are under the automatic route and the transfer does not attract the provisions of Takeover Regulations prescribed by SEBI. Further, the requirement of prior approval of Reserve Bank for transfer of shares and convertible debentures by a person resident in India to a person resident outside India and by a person resident outside India to a person resident in India has been dispensed with. Now, only filings have to be made with the authorized dealer. However, this dispensation is not applicable to transfer of shares from resident to non-resident in financial service sector.

Conclusion

The key to any project finance is to use a right mix of debt and equity. Further, there should be a right mix of foreign currency and rupee loans. It is also essential that there should be flexibility in respect of switching from foreign currency to rupee loan and vice versa. There are a number ofissues highlighted herein above which need to be considered for the purpose of financing of the project. Besides, it is important that due care is taken in drafting the documents concerning the financing of the project.