Issue of Global Depository Receipt Rules

Rule 2. Definitions.

(1).

• In these Rules, unless the context otherwise requires:

• (a). Act means the Companies Act, 2013.

• (aa). Overseas depository or Overseas Depository Bank shall mean Foreign Depository as defined in the Scheme.

• (b). Section means section of the Act.

• (c). Scheme means the Depository Receipts Scheme, 2014, the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, or any later modification or re-enactment of these.

(2).

• If any word or expression appears in these rules but is not defined here, but is defined in either:

  1. The Companies Act,

  2. The Companies (Specification of Definitions Details) Rules, 2014, then:

• That word or expression will carry the same meaning as given in the Act or those Rules.

Rule 3. Eligibility to issue depository receipts.

• A company may issue depository receipts only if it is eligible under the relevant Scheme.

• A company must also comply with the applicable Foreign Exchange Management Rules and Regulations.

  
  Rule 4. Conditions for issue of depository receipts. 

(1).

• The company’s Board of Directors must pass a resolution approving and authorising the issue of depository receipts.

(2).

• The company must obtain prior approval from its shareholders by passing a special resolution at a general meeting.

• If the company has already passed a special resolution under section 62 for issuing the shares then:

  1. That will serve as the underlying shares for the depository receipts.

  2. That same special resolution will also be considered as a special resolution under section 41.

  3. So, the company does not need to pass a separate special resolution for section 41.

(3).

• The company must appoint an overseas depository bank.

• This overseas depository bank will issue the depository receipts.

• The underlying shares must be kept with a domestic custodian bank in India.

Underlying Shares

• When a company issues depository receipts to investors abroad, those receipts represent ownership in the company.

• But the depository receipts themselves are not the real shares.

• The real shares ; the actual equity shares of the company are kept in India with a domestic custodian bank.

• These actual shares are called underlying shares because the depository receipts are backed or supported by them.

(4).

• The company must follow all provisions of the relevant Scheme governing depository receipts.

• It must also comply with any rules, regulations, or guidelines issued by the Reserve Bank of India (RBI).

• These compliance requirements apply both before the issue of depository receipts and after the issue as well.

(5).

• The company must appoint one of the following professionals to oversee compliance for the issue of depository receipts:

  1. A merchant banker.

  2. A practising chartered accountant.

  3. A practising cost accountant.

  4. A practising company secretary.

• This professional is responsible for checking and ensuring all legal and regulatory compliances related to the issue.

• The company must obtain a compliance report from the appointed professional.

• This compliance report must be presented at a meeting of:

  1. The Board of Directors.

  2. A committee of the Board authorised for this purpose.

• The Board or committee meeting must be held immediately after all formalities of the issue are completed.

• If the company is legally required to have independent directors, then:

• The Board committee that reviews the compliance report for the issue of depository receipts ust include at least one independent director as a member.

  
  Rule 5. Manner and form of depository receipts.

(1). Omitted.

(2).

• Depository receipts can be issued in two ways:

  1. (a). Against new shares issued by the company.

  2. (b). As sponsored depository receipts, which are issued against existing shares already held by the company’s shareholders.

• These issuances must follow the conditions laid down or prescribed by the Central Government or the Reserve Bank of India.

• Any updated conditions or guidelines issued by these authorities from time to time must also be followed.

(3).

• The company must allot the underlying shares (the actual equity shares) in the name of the overseas depository bank.

• After receiving these underlying shares, the overseas depository bank will then issue the depository receipts to investors abroad.

Rule 6. Voting rights  

(1).

• A person who holds depository receipts is not automatically a member of the company.

• The holder can become a member only when the depository receipts are converted into the underlying shares.

• After conversion, the holder’s name is entered in the company’s register of members.

• The holder can exercise voting rights only after this conversion takes place.

• The conversion must follow:

  1. The procedure laid down in the relevant Scheme.

  2. The provisions of the Companies Act.

(2).

• Until the depository receipts are converted into underlying shares, the overseas depository bank remains the registered holder of those shares.

• Because it is the registered holder, the overseas depository has the right to vote on the shares.

• The overseas depository must exercise these voting rights on behalf of the depository receipt holders.

• The manner in which the depository votes is governed by the agreement between:

  1. The overseas depository.

  2. The depository receipt holders.

  3. The company.

• This agreement decides how and when the depository will vote based on the instructions or rights of the DR holders.

Rule 7. Proceeds of issue.

• The money received from issuing depository receipts must be placed in one of the following:

• (a). A bank account in India.

• (b). An Indian bank operating abroad.

• (c). A foreign bank that:

  • Is recognised as a Scheduled Bank under the RBI Act, 1934.

  • Has operations in India.

• If the proceeds are deposited with such a foreign bank then:

• The bank must agree to take responsibility for providing all information required by Indian authorities.

Sponsored Issue

• In a sponsored depository receipt (DR) issue:

  1. The company does not issue new shares.

  2. Instead, existing shareholders offer some of their already-held shares.

  3. These shares are handed over to the overseas depository bank.

  4. The overseas depository bank then issues Depository Receipts (GDRs/ADRs) to foreign investors against those existing shares.

• In a sponsored depository receipt issue:

  1. The money received from selling those shareholders’ shares must be credited directly to each shareholder’s own bank account.

  2. The company does not receive this money.

  3. Another option for handling DR proceeds is:

     1. The proceeds of depository receipt issues may also be remitted to an International Financial Services Centre Banking Unit (IBU).

     2. Once remitted to an IBU, the proceeds must be used according to RBI’s instructions issued from time to time.

     3. Remitted essentially means sent, moved, or transferred.

Rule 8. Depository receipts prior to commencement

(1).

• Some companies had already issued depository receipts before these rules came into effect.

• Such companies must now ensure they meet all the requirements laid down in the new rules.

• They must complete this compliance within six months from the date the rules commenced.

(2).

• Six months after these rules have come into force:

• Every new issue of depository receipts by any company

• Must fully comply with the requirements set out in these rules.

Rule 9. Non applicability of certain provisions of the Act.

(1).

• The Companies Act contains rules that apply to public issues of shares or debentures (like prospectus requirements, filings, procedures, etc.).

• These public-issue provisions do not apply when a company issues depository receipts.

• So the process for issuing depository receipts is governed only by the specific DR rules and the relevant Scheme, not by the public issue rules of the Act.

(2).

• If a company prepares an offer document for issuing depository receipts (no matter what the document is called):

• That document will not be considered a prospectus or offer document under the Companies Act.

• Therefore, none of the legal requirements that apply to a prospectus or offer document under the Companies Act will apply to the depository receipt offer document.

(3).

• Normally, section 88 of the Companies Act sets rules for maintaining the Register of Members.

• However, this provision creates an exception: For depository receipts, the rules of section 88 do not apply in this respect.

• Until the depository receipts are redeemed or converted:

  1. The overseas depository bank’s name must remain entered in the company’s Register of Members.

  2. This is because the overseas depository bank holds the underlying shares on behalf of the DR holders.