Depository Receipts and Voting Rights

SEBI has written to the Ministry of Finance and the Reserve Bank of India to curb the practice whereby holders of ADRs/GDRs pass on their voting rights to boards or managements of the companies in which they hold these instruments. As the Economic Times reports:
The Securities & Exchange Board of India (Sebi) has recommended a change in current rules to allow holders of American Depository Receipts or Global Depository Receipts issued by Indian corporates to exercise their voting rights, raising the possibility of increased shareholder activism in future.

Depository receipts, or DRs, are securities issued to overseas investors by Indian companies. In September 2009, the capital market regulator had brought holders of such securities under the takeover code. Investors or holders of ADRs/GDRs are entitled to vote on the shares underlying or representing the receipts, but their rights are restricted by the clauses in the ‘terms of issue’ or agreements between the holders of these instruments and the issuers. In reality, their voting rights are as good as having none.

The regulator now wants to prevent Indian firms issuing ADRs/GDRs from incorporating provisions which curtail the voting rights of depository receipt holders and which empower the management to exercise voting rights on their behalf. The finance ministry and the Reserve Bank of India will need to amend the rules to bring into force the proposed changes.

The issue that this proposal seeks to address is outlined below:
Most companies have issued ADRs/GDRs featuring clauses where the voting rights are in favour of the management. In some cases, the boards of issuer companies instruct the custodian bank—which holds the actual shares on behalf of ADR/GDR holders—to vote for them. In other cases, the right is vested with depository holders. However, in the event of their failure to exercise their voting right, it is deemed to have vested with the board of the issuer company. These instructions are incorporated in the agreement or ‘terms of issue’.
This proposal is expected to enhance corporate governance among companied that have issued DRs and to stimulate investor activism, and has generally been lauded. However, it leaves certain questions unanswered, particularly given the lack of strong empirical evidence on exercise of available voting rights by ADR/GDR holders.
1. The typical ADR/GDR investor is a financial institution with a certain measure of sophistication to determine whether or not to invest in the ADRs/GDRs which do not carry voting rights. In such circumstances, is there a need for the regulator to intervene and insist on conferring voting rights upon investors?
2. Such institutional investors may likely be interested in the economic return on the investment rather than control rights, due to which they may be indifferent to the availability of voting rights. Even when crisis situations emerge, such investors are likely to vote with their feet (as we witnessed in the massive ADR sell-off in Satyam) rather than in a general meeting.
3. Even when voting rights are available (e.g. generally in a company), there is no compulsion to exercise those rights. On the contrary, shareholders are free to pass on those rights to others on a discretionary basis, such as through a proxy. In the case of a depository agreement of the nature sought to be curbed by SEBI, it just so happens that the ADR/GDR holder passes on those rights up front without seeking to exercise them at each general meeting.
4. In case voting rights become crucial to any ADR/GDR investors, it is always open to them to convert those securities into underlying shares and exercise all concomitant rights, including to directly vote at a meeting.

Although SEBI’s previous decision to make ADRs/GDRs with voting rights subject to the open offer requirements under the Takeover Regulations is understandable, it is not clear whether a strong case has been made out for a wholesale ban on the ability of holders to confer voting rights on the board, management, depository or any other person.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Umakanth,
    Though I agree with many of the things you say here – there is no presumption that ADRs are held by large institutions only. They are held by everyone just as US shares are – which means anyone with 2$ could pick up an ADR.

    Sandeep Parekh

  • Hi Uma,

    I had a slightly different take on some of the points that you make in this post:

    1. My experience in a publicly held Indian company that has passed on voting rights to ADR holders, indicates that ADR holders do participate in shareholder meetings, even routine ones, should they be given an opportunity to do so.

    Our deposit agreement allows ADR holders to indirectly participate in general meetings by nominating a company representative to vote on their behalf. In brief, the process is as follows:

    • The depositary mails an abbreviated general notice of meeting to ADR holders in advance of a general meeting.
    • The holder is entitled to notify his instructions to the depositary.
    • The depositary in turn notifies a company representative to attend such meeting and vote the ADRs in accordance with the directions of the holder.
    • The depository cannot vote shares represented by ADRs absent such instructions.

    Over the past few years, we have had shares representing more than half the ADSs in circulation participate in the general meeting (even when mostly routine matters came up for voting). So, the availability of a mechanism does seem to encourage ADR holders to actively participate.

    2. I also think that a deposit agreement that fails to allow an opportunity to ADR holders to participate acts to restrict an ADR holder from exercising rights in an underlying share far more than one who holds equity directly. The right of an equity shareholder to pass on his voting rights to a proxy is specific to a single meeting whereas an ADR holder gives up his voting rights across a number and variety of shareholder meetings.

    3. The option to convert ADRs into underlying shares does exist but it is not always easy or practical for an ADR investor to convert them into equity or for him to reconvert equity shares into ADR form. It is unlikely that a shareholder would convert his shares merely to exercise his rights in general meeting given the logistical difficulties in doing so.

    Finally, it also appears that forcing companies to pass on voting rights to ADR holders would also preempt companies from floating depositary receipts to exploit the economic interests of certain categories of investors while retaining management control. This appears prevalent in the case of GDRs more than ADRs given the lower disclosure thresholds applicable. Therefore, on balance, I think it is good that SEBI has finally decided to force a company’s hand in respect of voting rights relating to ADRs/ GDRs, although the mechanism by which they would do so remains to be seen.

    Hari Bhardwaj

  • (@ Hari).You report a very welcome development but I am inclined to believe that your experience is an exception rather than the rule. It might be that the costs of gathering information to vote are lower in the case of your company but that is not the rule.

    @ Umakant: A vast majority of ADR holders subscribe the same for the cash flow rights rather than the voting rights. In this respect I agree with you.

    But principle demands that the option to vote be given by the terms of the issue to the ADR subscribers; whether to vote or otherwise is after all their privilege and should be left to that.

    I beg to differ with you when you say that, "it just so happens that the ADR/GDR holder passes on those rights up front without seeking to exercise them at each general meeting."

    I beg to differ here because these terms of issue are boiler-plate terms that the investor cannot selectively opt out of. So, its "deemed" that they delegate.

    Finally, it is true that the option to convert into underlying shares is present; but the costs of exercising that option are low only in cases of important corporate events; not day-to-day voting.

    By enabling the foreign subscribers to vote their ADRs, we might "import" shareholder activism that is otherwise absent in domestic context.

    In this sense, this move may be commendable. Although I continue to believe that (unless the minimum subscription is raised so that exit is costlier than voice), voting, whether by shareholders proper or by ADR-holders, is irrational.

  • Mandar,

    Actually, the process is not overly expensive or laborious, when considered in relation to the overall costs of compliance with foreign listing norms.

    I would imagine that the number of holders of ADRs/ GDRs would be of a much lower degree than holders of equity shares for most Indian companies. A simple voting card can be used to collect voter preferences, and the notice and annual report can be hosted on the company’s or the depositary’s website (under for instance, the US eproxy rules). I suspect that we would see the physical voting card also being done away with soon enough, and replaced by a secure online voting tool.

    It does occur rather infrequently in practice though.

    It would be interesting to see what impact of throwing ADR votes into the mix would actually have!

  • Better late than never.

    It’s a good move by SEBI. Because having control over the voting rights is effectively circumventing the provisions of takeover regulations.

    What can be done (with an open offer) directly should not be done indirectly.


  • Dear Umakanth,

    Whereas the issue of voting rights for ADR/GDR holders was a part of the Agenda for the May 19, 2010 Board Meeting (available at, the SEBI Press Release PR No.122/2010 (available at has no record of any decision of SEBI in this regard. Do you have any clarity on any official communication of SEBI's decision on this?


    A Curious Associate

  • @ A Curious Associate. As far as I can see, it is unlikely that SEBI has in fact taken a decision on this matter, as the entire ADR/GDR regime is within the regulatory purview of the Ministry of Finance (MOF) and the Reserve Bank of India (RBI). What one can gather from press reports is that SEBI has made a proposal to the MOF and RBI for their decision.

  • Pending such an amendment to the GDR-ADR scheme by the MoF, SEBI can at the most amend the equity listing agreement to prohibit such a practice.



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