Indian Companies Issuing Securities Overseas

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stands repealed to the extent that it applies to depository receipts.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.

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.

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