A Depository Receipt (“DR”) was developed originally to raise equity funding from foreign sources. It is thus issued in a foreign jurisdiction on the back of domestic securities in the home jurisdiction. Domestic securities are deposited with a domestic custodian of the foreign depository and DRs are issued by the depository bank against such deposited domestic securities. These DRs are listed and traded in the foreign country’s stock exchange like any other security. They are mirror-images of domestic securities deposited with the domestic custodian. Foreign investors can invest in DRs similar to any other security in their home country.
The Depository Receipts Scheme, 2014 defines a DR to mean a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in Section 2(44) of the Companies Act 2013.
At this point it is important to note that there are various kinds of DRs, most commonly used is the American Depository Receipt (popularly known as ADR) and Global Depository Receipts (popularly known as GDR). The former provides foreign issuers to list their securities through DR route onto American stock exchanges like the New York Stock Exchange or the NASDAQ, whereas the latter onto Stock Exchanges in Europe. This vice versa opens up the opportunity for the citizens of these jurisdiction to invest in securities of foreign companies which would otherwise not be available.
The scale of Balance - Regulation
Since DRs involve foreign securities, foreign investors and foreign jurisdiction, it becomes all the essential to recognize that protocols need to be designed so as to suit the circumstances that arise from the nature of this security. When underlying Indian securities are bundled into DRs or the DRs are cancelled and converted into the underlying Indian securities, the Indian investor and Securities market in India may be affected. Therefore, the state intervention in regulating DRs requires to merely ensure that DRs issued abroad against Indian securities do not compromise the interest of Indian investors.
Depository Receipt Frameworks over the years
The Central Government notified the ‘Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through depository receipt mechanism) Scheme 1993.’ Notably, the Scheme defined GDR to mean any instrument in the form of a DR or certificate (by whatever name it is called) created by an Overseas Depository Bank (“ODB”) outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bond (“FCCB”) of the issuing company. ("issuer") Under this scheme, an issuer was defined to mean an Indian company permitted to issue FCCB or ordinary shares of that company for the purpose of creating GDR. Further, an ODB had been defined herein to mean a bank authorized by an issuing company to issue GDR against the issue of ordinary shares of the issuing company. Finally, a Domestic Custodian Bank (“DCB”) meant a banking company which acts as a custodian for the ordinary shares or FCCBs of Indian companies issued by it against GDR or certificate.
Any issuer wishing to raise foreign funds by way of issuing FCCBs or ordinary shares for equity shares through GDR was required to obtain the prior permission of the Department of Economic Affairs.
The Scheme facilitated issue of GDR for one or more underlying shares held with the DCB. These GDRs were required to be denominated in ‘any freely convertible foreign currency’ whereas the ordinary shares only in Indian currency. The issuer was vested with the liberty to determine the issue details (whether public or private placement), number of GDRs to be issued, price of the issue, the interest rates payable on the FCCB, conversion price, coupon and pricing of conversion options. No lock-in period was required for GDRs issued under this Scheme.
The GDRs issued under this Scheme were permitted to be listed on any one overseas stock exchanges or even over-the-counter exchanges or through Book-Entry Transfer System prevalent abroad and such receipts can be purchased, possessed and freely transferred by a person who is a non-resident per the Foreign Exchange Regulation Act, 1973.
Redemption - A non-resident holder of GDR had the option to transfer the DRs or to ask the ODB to redeem them. In case of redemption, ODB was required to request the DCB to get the corresponding underlying shares released in favour of the non-resident investor for being sold directly on behalf of the non-resident being transferred in the books of account of the issuing company in the name of non-resident. On redemption, the cost of acquisition of shares underlying the GDR should be reckoned as the cost on the date on which the ODB advices the DCB for redemption.
Pricing - The price of ordinary shares of the issuing company prevailing in the Bombay Stock Exchange or the National Stock Exchange on the date of advice of redemption were mandated to be considered as the cost acquisition of the underlying ordinary shares.
Per this Scheme, GDR was issued by the issuer based on ordinary shares deposited with the DCB and issued by corresponding ODB depending on the extent of ordinary shares held by the DCB. Once such GDR is issued by the ODB, which has relevant approvals from appropriate regulators in India as well as at global level, the GDR becomes approved registered authenticated instrument over which any non-resident can make an investment for possessing it as a valid GDR holder.
The Securities Market Regulator, Securities and Exchange Board of India vide Notification F.NO.9/1/2013-ECB, dated October 21, 2014, issued the Depository Receipt Scheme, 2014. On basis of this, amendments were made by the Reserve Bank of India to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (“TISPRO”) with effect from December 15, 2014. This Scheme is based on recommendations of the Sahoo Committee Report which held at its bedrock, the principle of neutrality against foreign investor’s mode of purchase and Indian issuer’s mode of raising capital as long as basic minimal capital controls are complied with.
The Scheme defines ‘depository receipt’ to mean a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes GDR as defined in S. 2(44) of the Companies Act. This Scheme broadens the definition of domestic custodian to mean a custodian of securities, an Indian depository, a depository participant or a bank and having SEBI’s permission to provide custodian’s services under this scheme.
This Scheme defined ‘International exchange’ to mean ‘a platform for trading of DR, which is in a permissible jurisdiction, accessible to the public for trading and provides pre-trade as well as post-trade transparency to the public’.
‘Permissible Securities’ were defined as under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 and including similar instruments issued by private company which may be acquired by a person resident outside India under the Foreign Exchange Management Act, 1999 and is in dematerialized form. Thereby, the 2014 Scheme expanded its ambit by including debt instruments.
A foreign depository was provided with the flexibility to issue DRs by public or private placement. An issuer had the discretion to issue permissible securities to foreign depository by any mode permissible for the issue of such permissible securities to investors. These DRs are envisaged by the Scheme to be freely transferable.
The Sahoo committee had noted, by using an event study, that DRs had failed to have an expected impact on domestic trading volume of Indian securities in its run. It thereby observed a mismatch in the treatment of same DR under separate regulations, while DR holders having the right to give voting instructions have obligations under the Takeover Regulations 2011, such DRs themselves were not calculated as part of public shareholding. To cure this, the Securities Contract (Regulation) Rules 1957 was amended on February 25, 2015, to include listed shares’ underlying DRs within the ambit of public shareholding.
In light of the amendment to TISPRO, the terms 'domestic custodian' and 'depository receip't were specifically defined, in addition to major changes made to Schedule I and addition of Schedule X therein.
However, the 2014 Scheme and consequent amendments did lead to several confusion contingencies. SEBI expressed concerns that ADR and GDR are difficult to monitor and can be used for money laundering and market manipulation. SEBI saw the unsponsored DRs, a concept introduced in the progressive 2014 Scheme, as a potent risk. The other issues raised by Sebi with respect to DRs include difficulties in tracking the ultimate beneficiary, the potential for unsolicited takeovers and money laundering.
Ministry of Finance, vide notification in the Official Gazette amended the Depository Receipts Scheme 2014 to include International Financial Services Centre ("IFSC") in India in the list of permissible jurisdictions where foreign currency denominated DRs can be issued. More than 30 FATF compliant countries are already notified permissible jurisdictions. Further, it omitted the word foreign from the existing definition of “Permissible Jurisdiction” in Sec. 2 (1) (g) to facilitate this change.
This was followed by the SEBI notification no. SEBI/HO/MRD/DOP1/CIR/P/2019/106 dated October 10, 2019. Vide this notification, SEBI laid down the Framework for the issue of Depository Receipts. The DR Framework 2019 provides that only ‘a company incorporated in India and listed on a Recognized Stock Exchange in India may issue Permissible Securities or their holders may transfer Permissible Securities for the purpose of issue of DRs, subject to compliance with the requirements laid down therein.'
A listed company in compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 would be eligible issuer for this framework if:
the Listed Company, any of its promoters, promoter group or directors or selling shareholders are not debarred from accessing the capital market by SEBI;
any of the promoters or directors of the Listed Company is a promoter or director of any other company which is not debarred from accessing the capital market by SEBI;
the listed company or any of its promoters or directors is not a wilful defaulter;
any of its promoters or directors is not a fugitive economic offender.
It also provides for eligibility requirements for existing holders wishing to transfer permissible securities for purpose of issue of DR. Permissible Securities of existing holders, for the purpose of issue of DRs is permitted only in permissible jurisdictions and said DRs can be listed on any of the specified international exchanges of such permissible jurisdiction. Permissible jurisdiction would mean jurisdiction as notified by the Central Government from time to time. [Note, IFSC was included in permissible jurisdiction by Amendment to the 2014 Scheme].
The 2019 Framework provides that Listing of DRs on specified International Exchange shall meet the highest applicable level / standards for such listing by foreign issuers. (i.e. Issuer-sponsored Level III ADR programs listed on Nasdaq or the NYSE, DRs listed on the Main Board of the Hong Kong Stock Exchange, etc). Permissible Securities include equity shares and debt securities, which are in dematerialized form and rank pari passu with the securities issued and listed on a Recognized Stock Exchange.
The framework lays down issuer company obligations such as compliance with the holding limits, filing of a copy of the initial document for initial issue of DRs issued on the back of permissible securities as well as timely disclosure and reporting requirements. Permissible holder is a DR holder including its Beneficial Owner who is not a PROI or NRI. This, to an extent, resolves the issues raised by SEBI earlier with the 2014 Scheme.
Voting - Interestingly, the framework provides that listed Company shall ensure that the agreement entered between the holder of DRs, the Listed Company and the Depository provides that the voting rights on Permissible Securities, if any, shall be exercised by the DR holder through the Foreign Depository pursuant to voting instruction only from such DR holder.
Pricing - Pricing in case of simultaneous listing of permissible securities on recognized stock exchange(s) pursuant to a public offer/ preferential allotment/ qualified institutions placement under SEBI (ICDR) Regulations 2018 and DRs on International Exchange, the price of issue or transfer shall not be less than the price for the same to domestic investors under the applicable law. Similarly in case of transfer of permissible securities. Furthermore, caps are to be complied with by the Indian Depositories. Finally, the domestic custodian is required to maintain records and report to Indian depositories all transactions in nature of issue and cancellation of depository receipts for the purpose of monitoring limits.
"This will give Indian companies increased access to foreign funds through American Depository Receipt (ADR)/ Global Depository Receipt (GDR)," - Sitharaman during Budget Speech 2019.
 Pratik Datta, The Depository Receipts Scheme, 2014: Lessons in Policy Implementation, NLS BUSINESS LAW REVIEW (2015).
 Supreme Court in Securities and Exchange Board of India v. Pan Asia Advisors Ltd.  59 taxmann.com 80 (SC) recognized that such depository receipts are “securities” as defined under Section 2(g) of the Securities Contract (Regulation) Act.
 Supra, note 1.
 Paragraph 2(c), the 1993 Scheme.
 Paragraph 2(d), the 1993 Scheme.
 Paragraph 2(e), the 1993 Scheme.
 Paragraph 3(1), 3(1)(iii), 3(1)(iv), 3(2) and 3(3), the 1993 Scheme.
 Paragraph 5, the 1993 Scheme.
 Paragraph 5, the 1993 Scheme.
 Paragraph 5, the 1993 Scheme.
 Paragraph 5, the 1993 Scheme.
 Paragraph 6, the 1993 Scheme.
 Paragraph 7(1), the 1993 Scheme.
 Paragraph 7(3), the 1993 Scheme.
 Paragraph 2(1)(a), the 2014 Scheme.
 Paragraph 2(1)(b), the 2014 Scheme.
 Paragraph 2(1)(f), the 2014 Scheme.
 Paragraph 4(2), the 2014 Scheme.
 Paragraph 4(3), the 2014 Scheme.
 Supra, note 1.