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“ Global Depository Receipts (GDR) – Compliance, Procedure and Listing”
What is a GDR? It is an instrument in the form of a depository receipt or certificate created by the Overseas Depository Bank outside India and issued to Non- resident investor against the issue of ordinary shares or Foreign Currency Convertible Bonds of Issuing Company.
Eligibility for Issue of GDRs An Indian corporate can raise foreign currency resources abroad through the issue of Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing GDRs.
Conditions for Issue of GDRs The GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time. A GDR is permitted by RBI under Automatic Route subject to the sectoral caps as specified vide Press Note No.14 (1997 series) dated 8th October 1997 issued by the Government of India, Ministry of Industry.
Conditions for Issue of GDRs contd… The company not covered under the Automatic route, would need to obtain prior Government clearance through FIPB. There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets. There is no limit up to which an Indian company can raise GDRs. There is no restriction on the number of Euro-Issues to be floated by a company or a group of companies in a financial year.
Conditions for Issue of GDRs contd… Indian Companies engaged in the following sectors were 80% of turnover is from these sectors in 3 previous financial years can issue GDRs to their Non- Resident/Resident Permanent Employees and also to their subsidiary Companies: aInformation Technology and Entertainment Software. bPharmaceuticals cBio Technology These Companies can also acquire overseas companies in their respective areas of business through stock swap as per the guidelines issued by the government
Conditions for Issue of GDRs contd… GDR can be issued in any convertible foreign currency. The GDRs and the Shares to be represented by such GDRs will not be offered, sold or delivered within the United States or to or for the benefit of US persons as per the United States Securities Act of 1933, as amended (the "Securities Act") for a period of 40 days from the date of opening of the Issue. The GDRs may not be offered or sold directly or indirectly in the Republic of India ("India") or to, or for the account or benefit of, any resident of India.
Agencies Involved in the GDR Issue Lead Manager -The firm should be registered with the appropriate regulatory authority in Europe/ Singapore or Japan. Depository – Is an Overseas Bank authorised by the Issuing Company to Issue the GDRs. Listing Agent - Is a person who is responsible for the listing of the GDRs at any of the recognized Overseas Stock Exchanges. Generally the Depository also acts as the Listing Agent.
Agencies Involved in the GDR Issue contd… Custodian - It is the domestic Bank who holds the underlying shares/ Bonds Issued against the GDRs. Indian Legal Counsel - It is a firm that undertakes the Legal and Financial Due Diligence of the Issuing Companies on behalf of the Lead Manager. It also assists the Company in preparation of the Information Memorandum/ offer document for submitting it with the Overseas Stock Exchange.
Agencies Involved in the GDR Issue contd… UK Counsel - An overseas legal person who based on the Due Diligence Report of the Indian Counsel submits its report to the Overseas Stock Exchange. They also assist the Lead Manager in preparation of the various documents such as the Deposit Agreement, Subscription Agreement and vet the Information Memorandum (IM). Escrow Agent - An Overseas Bank where an Escrow Account has to be opened for deposit of the monies received from Investors against the GDR Issue till the Final Listing Approval is obtained from the Overseas Stock Exchange
Procedure for Issue of GDRs Convene a Board Meeting to approve the proposed GDR Issue for not exceeding certain value in foreign currency. Convene the EGM for the approval of the shareholders for the proposed GDR Issue under Sec 81(1A) of the Companies Act, 1956. Identify the Agencies Convene a Board Meeting to approve the Agencies. Appoint the Agencies and sign the Engagement Letters. The Indian Legal Counsel to undertake the Due Diligence.
Procedure for Issue of GDRs contd… Prepare the first draft of the IM in consultation with the Indian Legal Counsel and submit the same to various Agencies for their comments thereon. Prepare the 2 nd /3 rd draft of IM incorporating the comments. The Listing Agent to submit the IM with the overseas Stock Exchange for their comments and In principle Listing Approval. Simultaneously submit draft IM to the Indian Stock Exchanges where the Issuing Company’s shares are listed for In principle approval for listing of the underlying shares.
Procedure for Issue of GDRs contd… Hold Board Meeting to approve the Deposit Agreement, Subscription Agreement and the Escrow Agreement. On receipt of the comments on the IM from the Overseas and Indian Stock Exchanges incorporate the same and file the final IM with Overseas Stock Exchange and obtain Final Listing. The Issuing Company can open the Issue for the GDR on receipt of the In principle Listing Approval from the Overseas and the Indian Stock Exchanges.
Procedure for Issue of GDRs contd… Open the Escrow Account with the Escrow Agent and execute the Escrow Agreement. In consultation with the Lead Manager to finalize - whether the GDR will be through public or a private placement, - the number of GDRs to be issued. - the issue price. (the Issue price is normally 5-10 % discounted prevalent market price of the shares of the Issuing Company one day prior to the opening of the GDR Issue. - number of underlying shares to be issued against each GDR.
Procedure for Issue of GDRs contd… On the day of the opening of the Issue execute the Deposit and Subscription Agreements. The Issue should be kept open for a minimum period of 3 working days. Immediately on closing of the Issue convene a Board/ Committee Meeting for allotment of the underlying shares against the Issue of the GDRs. Then Deliver the share certificate to the Domestic Custodian Bank who will in terms of the Agreement instruct the Overseas Depository Bank to Issue the GDR to Non Resident Investor against the shares held by the Domestic Custodian Bank.
Procedure for Issue of GDRs contd… On receipt of Listing Approval from Overseas Stock Exchange submit the required documents for Final In principle Listing approval from Indian Stock Exchange. After GDRs are listed the Lead Manager to instruct the Escrow Agent to transfer the Funds to the Company’s Account. The Company can either remit the entire funds or in part as per its discretion.
Procedure for Issue of GDRs contd… On obtaining the Final Approval from Indian Stock Exchanges admit the underlying shares to the depository i.e., NSDL and CDSL. Obtain Trading approval. Intimate the Custodian for converting the physical shares into Demat.
Other Reporting Compliances and Issues Within 30 days of the closing of the GDR issue, details of the GDR Issue along with the IM should be submitted to -the Ministry of Finance. -the Registrar of Companies -SEBI Return of Allotment in Form 2 is to be filed with ROC within 30 days of Allotment. Annexure C is to be filed with RBI, Central office within 30 days of closure of the GDR Issue.
Other Reporting Compliances and Issues The Company should furnish quarterly return in Annexure D to the RBI, Central office for every calendar quarter. The Issue related expenses (covering both fixed expenses like underwriting commissions, lead managers charges, legal expenses and other reimbursable expenses) shall be subject to a ceiling of 4% in the case of GDR. The GDR holders shall not have any voting rights.
Conversion and Transfer of GDRs The holder of the GDR can transfer/sell the GDR in the Overseas Stock Exchange or request the Depository to cancel the GDR and release the underlying shares to his account. On acquiring the shares, the GDR holder becomes the member of the Company and he can trade his shares in the Indian Stock Exchanges. A registered broker in India may, with the permission of the custodian purchase shares of an Indian Company on behalf of a person resident outside India in the recognized Stock Exchange in India and deposit the same with the custodian for the purpose of converting the shares into GDRs.
Conversion and Transfer of GDRs contd… the number of shares so purchased shall not exceed GDRs converted into underlying shares and shall be subject to sectoral caps as applicable.
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