Historically, Indian companies have issued equity instruments in the form of depository receipts (either American depository receipts (ADRs) or global depository receipts (GDRs)) or convertible debt instruments in the form of foreign currency convertible bonds (FCCBs). Of late, such overseas securities issuances have reduced quite significantly. Now, the Government has revamped the legal regime for overseas issuance of securities so as to streamline it further, and facilitate further use of this capital raising route by Indian companies. The recent legal changes are two fold, one effected by the Ministry of Finance (MOF) and the other by the Ministry of Corporate Affairs (MCA).
New Scheme for Depository Receipts
Hitherto, all types of instruments, viz. GDRs, ADRs and FCCBs were governed by the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipts Mechanism) Scheme, 1993, which had been amended from time to time. By virtue of a notification issued by the MOF on October 21, 2014, the issuance of depository receipts has been taken out of the 1993 Scheme and is now regulated by the Depository Receipts Scheme, 2014. The 2014 Scheme allows Indian companies, whether listed or unlisted, to access the international capital markets using depository receipts. Such issuances can either be through a public offering of depository receipts or through a preferential allotment or qualified institutional placement. They can also either be sponsored by the issuer company or even unsponsored (e.g. when an existing shareholder offloads its holding through the issue of depository receipts). These issuances are subject to the usual foreign investment regime, including in relation to sectoral caps as well as pricing. Moreover, such issuances are permitted only to investors in certain specific jurisdictions as listed in the 2014 Scheme, which currently consists of a list of 34 countries.
The 1993 Scheme stands repealed to the extent that it applies to depository receipts. It will, however, continue to apply to FCCBs.
The 2014 Scheme effectively modernizes the process for overseas issuance of equity instruments by Indian companies. It is facilitative in nature, but at the same time contains some restrictions to guard against potential abuse of the mechanism.
Clarification for Foreign Debt Instruments
Separately, the MCA has issued a circular on November 13, 2014 clarifying that Chapter III of the Companies Act, 2013 will not apply to FCCBs or foreign currency bonds issued overseas by Indian companies. In other words, foreign issuance of debt instruments by Indian companies will not be subject to the prospectus and other disclosure requirements applicable under Indian law. This eases the regime for foreign issuance of debt instruments by Indian companies, making that route attractive for those companies that would like to avoid the onerous requirements under the Companies Act.
This dispensation is available only for issue of foreign debt instruments, and does not seem to be available for equity instruments such as ADRs/GDRs. Although previously both equity and debt instruments issued through this route required minimal compliance with local disclosure requirements, the new regime distinguishes between the two types. The regime governing foreign issuances of depository receipts therefore remains uncertain. It is not clear whether this is the result of a deliberate regulatory strategy. This may provide some amount of regulatory arbitrage favouring the FCCB regime over that of depository receipts.