Unlisted Two-Way Fungibility of ADRs GDRs
funj(il;ility of ADRs/GDRs under the’ issue of FCCBs and ordinary shares, through the depository receipt mechanism, arc summarised below. (a) Re-issuance of ADRs/GDRs. would be permitted to the extent of ADRs/GDRs that have been rlde med into underlying shares and sold in the domestic market. The arrangement is demand driven, with the process of reconversion emanating from the request for acquisition (If domestic shares hy ;1 non-resident investor for Issue of ADRs/GDRs. (b) The transaction under the reconversion arrangement would he distinct and separate from the FIJ portfolio investments. (e) The transaction should he effected through SEIlI registered stock brokers who will act as intermediaries between foreign investors and domestic shareholders.
A./general permission has been conveyed by he BI, authorising such stock brokers to acquire domestic shares on behalf of overseas investors and for placing with a domestic custodian. (d) For this purpose, all SEIlI registered brokers would be able to act as intermediaries in the two-way fungibility (If ADRs/GDR The RBI as conveyed general permission for these brokers to buy shares on behalf of overseas investors.
(e) As a secondary market transaction, the acquisition of such shares through the intermediary, on behalf of overseas investors, would fall within the regulatory purview of the SEm. he custodian would monitor the re-issuance and furnish a certificate to both the RI3I and the SErII to ensure that the sectoral caps arc not reached.
The RIll would rr;•..n•itor ‘the receipt of certificates from the custodian to this effect. The custodian would submit the certificate n a monthly basis, on the 10th of every month. (0 The domestic custodian, who is the intermediary between the overseas depos.tor; on the one hand and the Indian company on the other, would have. a record of the ADRs/GDRs is.~used, redeemed and sold in the domestic market. . (g) The domestic custodian would also be required to ascertain the extent of registration in favour of the ADR GDR holders/non- resident investors, based on the advice of the overseas depository to the domestic custodian, for the underlying shares being transferred in he books of account of the issuing company in the name of thl; non-resident, on redemption of the ADRslGDHs. . (h) The custodian is also equired to verify with the company secretary/NSDUCSDL in case the total cap is being breached in case there is a percentage cap.on oreign direct investment. (I) ‘On request by the overseas investor, for acquisition of shares for re-issuance of ADRs/GDRs, the SEIlI registered broker would purchase a given number of shares after verifying with the custodian whether there is any ‘head room’ available. (j) ead room Number of ADRs/GDRs originally issued minus the’ number of GDRS/ADRs outstanding further adjusted for ADR,/GDRs redeemed into underlying shares and registered in the; name of non-resident investors), The domestic custodian would nOlify the extent to .which re-issuance would be permissible: the redemption effected minus the underlying shares registered in the name of the non-resident investor, with reference 10 the original GDR ADR issue and adjustment on account of sectoral caps/approval limits. (k) .The Indian broker ould receive funds through normal banking channels for purchase of shares from the market. The shares would 1)(: purchased in the name f the overseas depository on a recognised stock exchange
. (I) Upon acquisition, the Indian broker would place the d~mestic shares with the ustodian; the arrangement would require a revised custodial agreement under which the custodian would be authorised by the company to ccept shares from entities other than the company. m) The custodian would advise the overseas depository on the custody of domestic hares and that corresponding ADR,/GDRs may IX:’ issued to the non-resident investor. n) The overseas depository would issue orresponding ADRs/GDRs to the investor. (0) The domestic custodian, in addition, would have to ensure that the advice issued to the overseas depository is on a first come first serve basis, that is, the first deposit of domestic underlying shares with a custodian would 1) dil(ihle for the first re-issuance of ADRs/GDRs tn overseas investors. p) The custodian would also have to ensure that ordinary shares deposited with it are only to the extent of depletion in the ADR GDR stock. This can be readily ensured by adopting a
system similar to the trigger mechanism adopted for FIls. Once the trigger mechanism is reached, say at 90 per cent of the depletion in the DRlG DR stock, each buying transaction of domestic shares would be completed only after the custodian has approved it. (q) A monthly report about the ADR GDR transaction under the two-way fungibility arrangement is to be made by the Indian custodian in the prescribed format; to the RBI and the SEBI both in the hard and soft copy, by the 10th of every month. (r~ The broker has to ensure that each purchase transaction is only “”.ainst delivery and payment thereof is received in foreign exchange. . (5) The broker would submit the contract note to he Indian custodian of the underlying shares on the day after the day of the purchase so that the custodian can reduce the head room accordingly. Copy of the contract note would also need be provided by the custodian to the RBI and the SEBI.
The broker should also ensure that a separate rupee account is maintained for the purpose of buying shares and effecting two-way fungibility. No forward cover ould be available for the amounts lying in the said rupee- account. The ADs (authorised dealers) would be permitted to transfer the monies lying in the above account on the request of the broker.
(t) The custodian of the underlying shares and the depositories would coordinate n a daily basis in computing the head room. Further, the company -secretary of each individual company would provide details of non- resident investment at weekly intervals to the Custodian and’ the depository. The custodian would monitor the re-issuance and furnish a certificate to both the RBI and the SEBI, to ensure that the sectoral. caps are not breached. The RBI would monitor the receipt of certificates from the custodian to this effect, (u) Re-issuance would be within the already approved/issued limits and would not only effectively mean transfer of ADRs/GDRs from one non-resident to another and accordingly no further approval mechanism is insisted upon. ‘(v) In the united two-day fungibility arrangement, the company is not involved in the process and is demand driven,
that is, requests for ADRs GDRs’ emanate from overseas investors. Consequently, tile expenses involved in the transaction are borne by the investors, which would include payments. due to the overseas intermediary/broker, domestic custodians, charges of the overseas and domestic brokers. . (w) The tax provision under Section 115-of the Income Tax Act, 1961, which is applicable to non-resident investors investing in ADRs GDRs offered gains issue of fresh underlying shares would extend to non-resident investors investing in foreign exchange in ADRs/GD Rs issued against existing shares under these guidelines, in terms of the relevant provisions of the Income Tax Act, 1%1. To facilitate the two-way fungibility f DRs/GDR. and in order to ensure easy tracking of the underlying shares released on the conversion of depository receipts, such shares hould be mandatorily credited to the separate depository receipts (DRs) accounts of each investor. Depositories should ensure to provide he following information to the custodian holding the underlying shares on a regular basis: (i) total number of shares at the beginning of he month, (ii) number of shares credited during the month, (iii) number of shares transferred out of the account (debited) during the onth nd (iv) balance at the end of the month.