OCTOBER 31, 2014

By Gurleen Kaur

GOVERNMENT has taken a number of policy initiatives to allow Indian Companies to raise resources from the International Market. Consequently, raising funds through Euro issues has become popular with the companies and investors both. Companies are taking the international market through Foreign Currency Convertible Bond (FCCB) and Equity Shares through Depository Receipts.

Definitions:

Foreign Currency Convertible Debenture - A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument.

Depository Receipts (DRs) are negotiable securities issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DR are commonly used by those companies which sell their securities in international market and expand their shareholding abroad. These securities are listed and traded in international stock exchange. These can be either:

• A global depository receipt or global depository receipt (GDR): it is a certificate issued by a depository bank, which purchase shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. On conversion of GDR into equity shares, they carry voting rights, yield rupee dividend and are tradable on Indian Stock Exchange like any other equity shares.

• An American depository receipt (ADR): it is a negotiable security that represents securities of a non-US company that trades in the US financial markets. Securities of a foreign company are raised through retail market in United States.

DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global Depository Receipts (GDRs). In the Indian context, DRs are treated as FDI and cannot be used in investment in Real Estate and Stock market.

FCCB and GDR may be denominated in any freely convertible foreign currency.

Eligibility

• Indian companies can raise foreign currency resources abroad through the issue of FCCB/ADRs/ GDRs, if it is eligible to issue shares to person resident outside India under the FDI Scheme, 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 Government of India.

• Unlisted companies, which have not yet accessed the FCCB/ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments.

• Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the Indian Stock Exchange on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier.

A stock broker in India, registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on instructions received from overseas investors.

Taxation on FCCB and GDR

• Conversion of FCCB into shares doesn't give rise to any capital gain liable to tax in India.

• Interest on FCCB are subject to TDS.

• Income by way of dividend on shares is taxed at rate of 10%.

Approvals required for raising ADR/GDR/FCCB:

Post issue Compliances:

• The Indian company issuing ADRs / GDRs has to furnish to the Reserve Bank, full details of such issue in the Form enclosed in Annex -10, within 30 days from the date of closing of the issue.

• The company should also furnish a quarterly return in the Form enclosed in Annex - 11, to the Reserve Bank within 15 days of the close of the calendar quarter.

• The quarterly return has to be submitted till the entire amount raised through ADR/GDR mechanism is either repatriated to India or utilized abroad as per the Reserve Bank guidelines.

Few Indian Companies found this route attractive and today more and more companies like, Dr. Reddy's laboratories limited, HDFC Bank Limited, Infosys Technologies Limited are trading in US and are trying this avenue to raise funds.

Several international banks issue GDRs, such as JPMorgan Chase , Citigroup , Deutsche Bank , The Bank of New York Mellon . GDRs are often listed in the Frankfurt Stock Exchange , Luxembourg Stock Exchange and in the London Stock Exchange.

Advantages of issuing ADR/GDR

• It is an easy and cost effective way to buy shares of a foreign company.

• Reduces administrative costs and avoids foreign taxes on every transaction.

• Helps companies which are listed to tap the American equity markets.

• Any foreigner can purchase these securities.

• The purchaser has a theoretical right to exchange shares (non- voting right shares for voting rights).

Advantages of issuing FCCB

• FCCB can be converted into equity shares at discount on prevailing Indian Market Price.

• 25% of FCCB proceeds can be used for general capital restructuring.

• The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock.

Conclusion:

Over the next few years more and more companies would be entering the US market by using such instruments. Just as important, more and more US investors will also be buying or starting to diversify their portfolios internationally by using such instruments.