IndiaCorpLaw

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.

Exit mobile version