Now, Sebi Wants to Clamp Down on Unsponsored DRs

REGULATOR NOT COMFORTABLE as DRs are transferable and identity of overseas holders is not certain

After curbs on participatory notes, India's capital market regulator is proposing a clamp down on unsponsored depositary receipts (DRs). An unsponsored DR is one which is not backed by the issuer company , but run by global custodians of shares (unlike a sponsored DR, which is backed by the company). A custodian buys shares from investors (and not the company) in the local market, creates a pool and facilitates trading of these shares abroad.

The Securities and Exchange Board of India (Sebi) is learnt to have told the government that it is not comfortable with allowing this instrument as DRs are transferable and the identity of the overseas holder will not be known.

“If you are uncomfortable with PNs (participatory notes) then this (un-sponsored DRs) is PN to the power of N,“ said a regulatory official familiar with the development.

In 2014, following the recommendations of the M S Sahoo committee, the government announc ed t he D e posit ory Receipts Scheme, which allowed the creation of unsponsored DR pro g rammes.Lawyers say concerns over par ticipatory notes and depository notes are the same: transparency .

“Indian regulators are concerned about the lack of information on the ultimate holders of such DRs. Information on the beneficial ownership of foreign securities has been a focus area in India as can be seen in the changes over time to the P-Notes regime,“ said Sandip Bhagat, partner at law firm S&R Associates. Following the government nod, BNY Mellon filed with the US SEC to create un-sponsored DR programmes of certain listed Indian companies.

“BNY Mellon and other depositary banks have been in regular and continuous dialogue with the finance ministry and Sebi, since the new scheme was announced in late 2014. We are eagerly anticipating the start in the near term,“ said a spokesperson for BNY Mellon.

A member of the MS Sahoo committee on DRs said there is no need for concern among Indian regulators over unsponsored DR issuances.

“The Indian regulators were well represented in the MS Sahoo committee that recommended enabling these instruments. The foreign investor in a foreign instrument is not a subject matter of protection by an Indian regulator, “ said Somasekhar Sundaresan, partner, J.Sagar Associates, who was part of the committee.

For companies, however, the bigger cause of concern is about their exposure to risks in the US market such as class action suit or additional compliance with the SEC.

The first DR programme for an Indian corporate, Reliance Industries, was established 20 years ago. Since 1992, over 330 Indian corporates have created DR programmes, 13 of which are listed on the New York Stock Exchange or NASDAQ and 24 are listed on the London Stock Exchange. The remainder have used the Luxembourg Stock Exchange or Singapore Stock Exchange to raise capital, according to a BNY Mellon report.

The Economic Times New Delhi,10th June 2016