Section 2(48) of Companies Act, 2013- Indian Depository Receipt

“Indian Depository Receipt” means any instrument in the form of a depositary receipt created by a domestic depository in India and authorized by a company incorporated outside India making an issue of such depository receipts.

Meaning

Let’s clarify what the definition means.

“Indian Depositary Receipts”: means specific type of financial instruments.

“Any instrument in the form of a depository receipt”: a depositary receipt is in the form of a negotiable certificate where the underlying asset is generally shares of a foreign company. Depositary receipts are financial instruments that represent ownership of securities (such as stocks) issued by foreign companies. This allows investors in one country to own shares in foreign companies without owning the shares themselves. “Executed by a domestic depositary in India”: Indicates that the depository receipt was created or issued by a depositary located in India.

“Authorized by a company incorporated outside India”: This indicates that the issue of depositary receipts is authorized by a foreign company incorporated (or registered) outside India. The foreign company is basically allowed to list and trade its own shares in the Indian market through depository receipts. “Issuance of such Depository Receipts”: This means the issue of depositary receipts in India by a foreign company through a domestic depositary institution.

Therefore, Indian Depository Receipts are a type of financial instrument issued by a domestic depository in India and represent ownership of securities (usually shares) in a foreign company. The issuance of these depositary receipts is authorized by foreign companies and allows Indian investors to hold shares in foreign companies indirectly through depositary receipts.

Global depository receipt— A company may, after passing a special resolution in its general
meeting, issue depository receipts in any foreign country in such manner, and subject to such conditions, as may be prescribed [Sec. 41 of Indian Companies Act, 2013].

Global Depository Receipts (GDRs)

Global Depository Receip is defined u/s 2(48) of Companies Act, 2013-

“Global Depository Receipt means any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorized by  company making an issue of such depository receipts.”

Further, Section 41 of the Act provides that a company may, after passing a special resolution in its general meeting, issue depository receipts in any foreign country in such manner, and subject to such conditions, as may be prescribed (under Companies (Issue of Global Depository Receipts) Rules, 2014)). For the purpose of issuing the GDRs under Companies (Issue of Global Depository Receipts) Rules, 2014, following conditions must be fulfilled –

Conditions for issue of depository receipts [Rule 4 of Companies (Issue of Global Depository Receipts) Rules, 2014)] –

(1) The Board of Directors of the company intending to issue depository receipts shall pass a resolution authorizing the company to do so.

(2) The company shall take prior approval of its shareholders by a special resolution to be passed at a general meeting:

Provided that a special resolution passed under section 62 for issue of shares underlying the depository receipts, shall be deemed to be a special resolution for the purpose of section 41 as well.

(3) The depository receipts shall be issued by an overseas depository bank appointed by the company and the underlying shares shall be kept in the custody of a domestic custodian bank.

(4) The company shall ensure that all the applicable provisions of the Scheme and the rules or regulations or guidelines issued by the Reserve Bank of India are complied with before and after the issue of depository receipts.

(5) The company shall appoint a merchant banker or a practising chartered accountant or a practising cost accountant or a practising company secretary to oversee all the compliances relating to issue of depository receipts and the compliance report taken from such merchant banker or practising chartered accountant or practising cost accountant or practising company secretary, as the case may be, shall be placed at the meeting of the Board of Directors of the company or of the committee of the Board of directors authorized by the Board in this regard to be held immediately after closure of all formalities of the issue of depository receipts:

Provided that the committee of the Board of directors referred to above shall have at least one independent director in case the company is required to have independent directors.

Section 390 of the Companies Act, 2013 empowers the Central Government of India to make rules for the provision of Indian Depositary Receipts (IDRs), like, Information requirements in a prospectus or offer letter, how IDRs are handled by in depository mode and by the custodians and underwriters, how to sell, transfer, and transmit IDRs etc.

Note – Transfer of Indian Depositary Receipts (IDRs) refers to the voluntary transfer of ownership of IDRs from one investor to another, similar to how stocks are bought and sold in the market. Transfer of IDR, on the other hand, involves automatic transfer of ownership of IDR by inheritance. This typically occurs upon the death of the IDR holder and the IDR is transferred to his or her heirs or legal beneficiaries.

Section 390: Offer of Indian Depository Receipts.

^*390. Notwithstanding anything contained in any other law for the time being in force, the Central Government may make rules applicable for—

(a) the offer of Indian Depository Receipts;

(b) the requirement of disclosures in prospectus or letter of offer issued in connection with Indian Depository Receipts;

(c) the manner in which the Indian Depository Receipts shall be dealt with in a depository mode and by custodian and underwriters; and

(d) the manner of sale, transfer or transmission of Indian Depository Receipts,

by a company incorporated or to be incorporated outside India, whether the company has or has not established, or will or will not establish, any place of business in India.

Rule – 13 of Companies (Registration of Foreign Companies) Rules, 2014 – Issue of Indian Depository Receipts (IDRs) –

(1) For the purposes of section 390, no company incorporated or to be incorporated outside India, whether the company has or has not established, or may or may not establish, any place of business in India (hereinafter in this rule called ‘issuing company’) shall make an issue of Indian Depository Receipts (IDRs) unless such company complies with the conditions mentioned under this rule, in addition to the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and any directions issued by the Reserve Bank of India.

Explanation.- For the purposes of this rule, the term “Indian Depository Receipt” (hereinafter referred to as ‘IDR’) means any instrument in the form of a depository receipt created by a Domestic Depository in India and authorized by a company incorporated outside India making an issue of such depository receipts.

(2) The issuing company shall not issue IDRs unless-

(a) its pre-issue paid-up capital and free reserves are at least US$ 50 million and it has a minimum average market capitalization (during the last three years) in its parent country of at least US$ 100 million; (b) it has been continuously trading on a stock exchange in its parent or home country (the country of incorporation of such company) for at least three immediately preceding years;

(c) it has a track record of distributable profits in terms of section 123 of the Act, for at least three out of immediately preceding five years; (Note – Sec. 123 of ICA deals with the reserve and dividend)

(d) It fulfills such other eligibility criteria as may be laid down by the Securities and Exchange Board of India from time to time in this behalf.

(3) The issuing company shall follow the following procedure for making an issue of IDRs:

(a) the issuing company shall, where required, obtain the necessary approvals or exemptions from the appropriate authorities from the country of its incorporation under the relevant laws relating to issue of capital and IDRs.

(b) issuing company shall obtain prior written approval from the Securities and Exchange Board of India on an application made in this behalf for issue of IDRs along with the issue size.

(c) an application under clause (b) shall be made to the Securities and Exchange Board of India (along with draft prospectus) at least ninety days prior to the opening date of the IDRs issue, in such form , along with such fee and furnishing such information as may be specified by the Securities and Exchange Board of India from time to time: Provided that the issuing company shall also file with the Securities and Exchange Board of India, through a Merchant Banker, a due diligence report along with the application under clause (b) in the form specified by the Securities and Exchange Board of India.

(d) the Securities and Exchange Board of India may, within a period of thirty days of receipt of an application under clause (c), call for such further information, and explanations, as it may deem necessary, for disposal of such application and shall dispose the application within a period of thirty days of receipt of further information or explanation: Provided that if within a period of sixty days from the date of submission of application or draft prospectus, the Securities and Exchange Board of India specifies any changes to be made in the draft prospectus, the prospectus shall not be filed with the Securities and Exchange Board of India or Registrar of Companies unless such changes have been incorporated therein.

(e) the issuing company shall on approval being granted by the Securities and Exchange Board of India to an application under clause (b), pay to the Securities and Exchange Board of India an issue fee as may be prescribed from time to time by the Securities and Exchange Board of India.

(f) the issuing company shall file a prospectus, certified by two authorized signatories of the issuing company, one of whom shall be a whole-time director and other the Chief Financial Officer, stating the particulars of the resolution of the Board by which it was approved with the Securities and Exchange Board of India and Registrar of Companies, New Delhi before such issue: Provided that at the time of filing of said prospectus with the Registrar of Companies, New Delhi, a copy of approval granted by the Securities and Exchange Board of India and the statement of fees paid by the Issuing Company to the Securities and Exchange Board of India shall also be attached.

(g) the prospectus to be filed with the Securities and Exchange Board of India and the Registrar of Companies, New Delhi shall contain the particulars as prescribed in sub-rule (8) and shall be signed by all the whole-time directors of the issuing company, and the Chief Financial Officer.

(h) the issuing company shall appoint an overseas custodian bank, a Domestic Depository and a Merchant Banker for the purpose of issue of IDRs.

(i) the issuing company may appoint underwriters registered with the Securities and Exchange Board of India to underwrite the issue of IDRs.

(j) the issuing company shall deliver the underlying equity shares or cause them to be delivered to an Overseas Custodian Bank and the said bank shall authorize the domestic depository to issue IDRs.

(k) the issuing company shall obtain in-principle listing permission from one or more stock exchanges having nationwide trading terminals in India.

Explanation- For the purposes of this rule,- (i) “Domestic Depository” means custodian of securities registered with the Securities and Exchange Board of India and authorized by the issuing company to issue IDRs. (ii) “Merchant Banker” means a Merchant Banker as defined in sub-regulation (cb) of regulation 2 of the Securities and Exchange Board (Merchant Bankers) Regulations, 1992. (iii) “Overseas Custodian Bank” means a banking company which is established in a country outside India and which acts as custodian for the equity shares of Issuing Company, against which IDRs are proposed to be issued by having a custodial arrangement or agreement with the Domestic Depository or by establishing a place of business in India.

(4) The Merchant Banker to the issue of IDRs shall deliver for registration the following documents or information to the Securities and Exchange Board of India and Registrar of Companies at New Delhi, namely:- (a) instrument constituting or defining the constitution of the issuing company; (b) the enactments or provisions having the force of law by or under which the incorporation of the Issuing company was effected, a copy of such provisions attested by an officer of the company be annexed; (c) if the issuing company has established place of business in India, address of its principal office in India; (d) if the issuing company does not establish a principal place of business in India, an address in India where the said instrument, enactments or provision or copies thereof are available for public inspection, and if these are not in English, a translation thereof certified by a key managerial personnel of the Issuing company shall be kept for public inspection; (e) a certified copy of the certificate of incorporation of the issuing company in the country in which it is incorporated; (f) the copies of the agreements entered into between the issuing company, the overseas custodian bank, the Domestic Depository, which shall inter alia specify the rights to be passed on to the IDR holders; (g) if any document or any portion thereof required to be filed with the Securities and Exchange Board of India or the Registrar of Companies is not in English language, a translation of that document or portion thereof in English, certified by a key managerial personnel of the company to be correct and attested by an authorized officer of the Embassy or Consulate of that country in India, shall be attached to each copy of the document.

(5) (a) No application form for the securities of the issuing company shall be issued unless the form is accompanied by a memorandum containing the salient features of prospectus in the specified form. (b) An application form can be issued without the memorandum as specified in clause (a), if it is issued in connection with an invitation to enter into an underwriting agreement with respect to the IDRs. (c) The prospectus for subscription of IDRs of the Issuing company which includes a statement purporting to be made by an expert shall not be circulated, issued or distributed in India or abroad unless a statement that the expert has given his written consent to the issue thereof and has not withdrawn such consent before the delivery of a copy of the prospectus to the Securities and Exchange Board of India and the Registrar of Companies, New Delhi, appears on the prospectus. (d) The provisions of the Act shall apply for all liabilities for mis­statements in prospectus or punishment for fraudulently inducing persons to invest money in IDRs. (e) The person(s) responsible for issue of the prospectus shall not incur any liability by reason of any non-compliance with or contravention of any provision of this rule, if- (i) as regards any matter not disclosed, he proves that he had no knowledge thereof; or (ii) the contravention arose in respect of such matters which in the opinion of the Central Government or the Securities and Exchange Board of India were not material.

(6) (a) A holder of IDRs may transfer the IDRs, may ask the Domestic Depository to redeem them or any person may seek reissuance of IDRs by conversion of underlying equity shares, subject to the provisions of the Foreign Exchange Management Act, 1999, the Securities and Exchange Board of India Act, 1992, or the rules, regulations or guidelines issued under these Acts, or any other law for the time being in force; (b) In case of redemption, Domestic Depository shall request the Overseas Custodian Bank to get the corresponding underlying equity shares released in favour of the holder of IDRs for being sold directly on behalf of holder of IDRs, or being transferred in the books of Issuing company in the name of holder of IDRs and a copy of such request shall be sent to the issuing company for information. (c) A holder of IDRs may, at any time, nominate a person to whom his IDRs shall vest in the event of his death and Form FC-5 may be used for this purpose.

(7) (a) The repatriation of the proceeds of issue of IDRs shall be subject to laws for the time being in force relating to export of foreign exchange. (b) The number of underlying equity shares offered in a financial year through IDR offerings shall not exceed twenty five per cent. of the post issue number of equity shares of the company. (c) Notwithstanding the denomination of securities of an Issuing company, the IDRs issued by it shall be denominated in Indian Rupees. (d) The IDRs issued under this Rule shall be listed on the recognized Stock Exchange(s) in India as specified in clause (k) of sub-rule (3) and such IDRs may be purchased, possessed and freely transferred by a person resident in India as defined in section 2(v) of the Foreign Exchange Management Act, 1999, subject to the provisions of the said Act: Provided that the IDRs issued by an Issuing company may be purchased, possessed and transferred by a person other than a person resident in India if such Issuing company obtains specific approval from Reserve Bank of India in this regard or complies with any policy or guidelines that may be issued by Reserve Bank of India on the subject matter; (e) Every issuing company shall comply with such continuous disclosure requirements as may be specified by the Securities and Exchange Board of India in this regard. (f) On the receipt of dividend or other corporate action on the IDRs as specified in the agreements between the Issuing company and the Domestic Depository, the Domestic Depository shall distribute them to the IDR holders in proportion to their holdings of IDRs.

(8) The prospectus or letter of offer shall, inter alia, contain the following particulars, namely:- (a) General information- (i) Name and address of the registered office of the company; (ii) name and address of the Domestic Depository, the Overseas Custodian Bank with the address of its office in India, the Merchant Banker, the underwriter to the issue and any other intermediary which may be appointed in connection with the issue of IDRs; (iii) names and addresses of Stock Exchanges where applications are made or proposed to be made for listing of the IDRs; (iv) the provisions relating to punishment for fictitious applications; (v) statement or declaration for refund of excess subscription; (vi) declaration about issue of allotment letters or certificates or IDRs within the stipulated period; (vii) date of opening of issue; (viii) date of closing of issue; (ix) date of earliest closing of the issue; (x) declaration by the Merchant Banker with regard to adequacy of resources of underwriters to discharge their respective obligations, in case of being required to do so; (xi) a statement by the Issuing company that all moneys received out of issue of IDRs shall be transferred to a separate domestic bank account, name and address of the bank and the nature and number of the account to which the amount shall be credited; (xii) the details of proposed utilisation of the proceeds of the IDR issue. (b) Capital Structure of the Company- The authorized, issued, subscribed and paid-up capital of the issuing company; (c) Terms of the issue- (i) rights of the IDR holders against the underlying securities; (ii) details of availability of prospectus and forms, i.e., date, time, place etc; (iii) amount and mode of payment seeking issue of IDRs; and (iv) any special tax benefits for the Issuing company and holders of IDRs in India. (d) Particulars of Issue- (i) the objects of the issue; (ii) the cost of the Project, if any; and (iii) the means of financing the projects, if any including contribution by promoters. (e) Company, Management and Project- (i) the main objects, history and present business of the company; (ii) the Promoters or parent group or owner group and their background: Provided that in case there are no identifiable promoters, the names, addresses and other particulars as may be specified by the Securities and Exchange Board of India of all the persons who hold five percent. or more equity share capital of the company shall be disclosed; (iii) the subsidiaries of the company, if any; (iv) the particulars of the Management or Board (i.e. Name and complete address(es) of Directors, Manager, Managing Director or other principal officers of the company); (v) the location of the project, if any; (vi) the details of plant and machinery, infrastructure facilities, technology etc., where applicable; (vii) the schedule of implementation of project and progress made so far, if applicable; (viii) nature of product(s), consumer(s), industrial users; (ix) the particulars of legal, financial and other defaults, if any; (x) the risk factors to the issue as perceived; and (xi) consent of the Merchant Bankers, Overseas Custodian Bank, the Domestic Depository and all other intermediaries associated with the issue of IDRs. (xii) the information, as may be specified by the Securities and Exchange Board of India, in respect of listing, trading record or history of the Issuing company on all the stock exchanges, whether situated in its parent country or elsewhere. (f) Report- (i) Where the law of a country, in which the Issuing company is incorporated, requires annual statutory audit of the accounts of the Issuing company, a report by the statutory auditor of the Issuing company, in such form as may be specified by the Securities and Exchange Board of India on – (A) the audited financial statements of the Issuing company in respect of three financial years immediately preceding the date of prospectus; (B) the interim audited financial statements in respect of the period ending on a date which is less than 180 days prior to the date of opening of the issue, if the gap between the ending date of the latest audited financial statements disclosed under clause (A) and the date of the opening of the issue is more than 180 days: Provided that if the gap between such date of latest audited financial statements and the date of opening of issue is 180 days or less, the requirement under item (B) shall be deemed to be complied with, if a statement, as may be specified by the Securities and Exchange Board of India, in respect of material changes in the financial position of Issuing company for such gap is disclosed in the Prospectus: Provided further that in case of an Issuing company which is a foreign bank incorporated outside India and which is regulated by a member of the Bank for International Settlements or a member of the International Organization of Securities Commissions which is a signatory to a Multilateral Memorandum of Understanding, the requirement under this paragraph, in respect of period beginning with last date of period for which the latest audited financial statements are made and the date of opening of the issue shall be satisfied, if the relevant financial statements are based on limited review report of such statutory auditor; (ii) Where the law of the country, in which the Issuing company is incorporated, does not require annual statutory audit of the accounts of the Issuing company, a report, in such form as may be specified by the Securities And Exchange Board of India, certified by a Chartered Accountant in practice within the terms and meaning of the Chartered Accountants Act, 1949 on – (A) the financial statements of the Issuing company, in particular on the profits and losses for each of the three financial years immediately preceding the date of prospectus and upon the assets and liabilities of the Issuing company; and (B) the interim financial statements in respect of the period ending on a date which is less than one hundred and eighty days prior to the date of opening of the issue have to be included in report, if the gap between the ending date of the latest financial statements disclosed under item (A) and the date of the opening of the issue is more than one hundred and eighty days: Provided that if the gap between such date of latest audited financial statements and the date of opening of issue is one hundred and eighty days or less, the requirement under item (B) shall be deemed to be complied with if a statement, as may be specified by the Securities And Exchange Board of India, in respect of changes in the financial position of Issuing company for such gap is disclosed in the Prospectus. (iii) the gap between date of opening of issue and date of reports specified under sub-clauses (i) and (ii) shall not exceed one hundred and twenty days; (iv) If the proceeds of the IDR issue are used for investing in other body(ies) corporate, then following details of such body(ies) corporate shall be given- (A) the Name and address(es) of the bodies corporate; (B) the reports stated in sub-clauses (i) and (ii), as the case may be, in respect of such body (ies) corporate also.” (g) Other Information- (i) the Minimum subscription for the issue; (ii) the fees and expenses payable to the intermediaries involved in the issue of IDRs; (iii) the declaration with regard to compliance with the Foreign Exchange Management Act, 1999. (h) Inspection of Documents- The Place at which inspection of the offer documents, the financial statements and auditor’s report thereof shall be allowed during the normal business hours; and (i) any other information as specified by the Securities and Exchange Board of India or the Income-tax Authorities or the Reserve Bank of India or other regulatory authorities from time to time.

Source – //taxguru.in/company-law/chapter-xxii-companies-registration-foreign-companies-rules-2014.html
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*Summary– The process of selling Indian Depository Receipts (IDRs) in the Indian market, especially in terms of the issue of the prospectus, involves several steps:

1. Eligibility: The foreign issuing company should have pre-issue paid-up capital and free reserves of at least US$ 50 million and a minimum average market capitalization (during the last three years) in its parent country of at least US$ 100 million.
2. Filing of Draft Prospectus: The issuing company, through a merchant banker, files a draft red herring
   prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). This document is examined by SEBI. The prospectus or letter of offer is certified by two authorized signatories of the issuing company, one of whom shall be a whole-time director and the other the Chief Accounts Officer.
3. Approval from SEBI: After SEBI gives its approval, the company sets the issue dates and files the
   document with the Registrar of Companies.
4. Public Offering: The issuing company makes a public offer in India, and residents can bid in exactly the same format and method as they bid for Indian shares.
5. Marketing the Issue: Following this, the company goes ahead with marketing the issue.
   Please note that this is a high-level overview and the exact process can vary based on the specific regulations and the company’s circumstances. For the most accurate information, it’s always best to consult with a financial advisor or legal expert.

(Sources – https://www.angelone.in/knowledge-center/share-market/indian-depository-receipts, https://corpbiz.io/learning/a-complete-checklist-of-indian-depository-receipts/ ,https://www.myespresso.com/share-market-knowledge/share-market/what-is-an-indian-depository-receipt)

An Analysis of the Case – SEBI V Pan Asia Advisors Ltd. & Anr.
It is a landmark case in which Supreme Court decided the issue of jurisdiction. Appeal was made by SEBI against the Order passed by SAT denying the jurisdiction of SEBI, Appeal Accepted.

Facts–

Asahi had 3,71,96,000 fully paid equity shares and GDRs issued was about eight times of its outstanding share capital. The first respondent herein was appointed as the Lead Manager for the GDR issued and the entirety of the share capital of the first respondent was held by the second respondent. It was mainly stressed at the instance of SEBI that there was a loan taken from Euram by Vintage for subscribing to the GDRs of Asahi and that the same was managed by a loan and pledge agreement signed not only by Vintage and Euram but by Asahi as well. According to SEBI, the second respondent herein structured the loan and pledge agreement to which Asahi, Vintage and Euram were signatories and the terms of the loan agreement as well as the pledge agreement were intertwined and they were the keys to the alleged fraudulent issuance and subscription of GDRs. Managing Director of Vintage, under the loan agreement, Euram sanctioned a loan of 59,82,000 USD to Vintage, the borrower to enable Vintage to take Asahi’s GDRs and thereafter to transfer to Euram A/c No.540030. However, as a matter of fact, it was found that A/c No.540030 in Euram was Asahi’s account.

Issue – Whether SEBI has a jurisdiction to decide the case as the GDRs were issued in the foreign market.

Observations Made by SEBI

The arrangement involving Asahi, Vintage, and Euram Bank in the issuance and subscription of Global Depository Receipts (GDRs) created a complex financial structure that raised regulatory and legal concerns, particularly regarding the authenticity of the capital being raised. Here’s an elaboration of the setup and why it raised concerns:

1. Common Ownership or Control Over the Bank Account: The heart of the issue lies in the use of a specific bank account at Euram Bank. This account was ostensibly controlled or commonly owned by the involved parties (Asahi, Vintage, and possibly Euram), which is unusual in a typical financial transaction involving external parties. Such a setup is not common practice in transparent financial dealings, where clear distinctions between the accounts of different entities are maintained to ensure accountability and regulatory compliance.
2. The Loan from Euram to Vintage: Euram Bank provided a loan to Vintage specifically for the purpose of subscribing to Asahi’s GDRs. This in itself is not unusual, as financial institutions often provide loans to firms for investment purposes. However, the context and conditions surrounding this loan are critical, particularly how it ties back to Asahi and the use of the proceeds.
3. Deposit of GDR Proceeds in Asahi’s Account at Euram: The proceeds from the issuance of GDRs, which were supposed to represent capital raised from international investors, were to be deposited directly into Asahi’s account at Euram Bank. This direct flow of funds back into Asahi’s control, funded by a loan from the same bank for the purpose of buying those very GDRs, creates a loop that obscures the true source and nature of the capital being raised.
4. Circular Flow of Funds: The described arrangement results in a circular flow of funds, where money from Euram to Vintage for the purchase of GDRs ends up back in Asahi’s account at Euram. This circularity gives the appearance of raising capital through external investors when, in fact, the capital does not come from independent external sources but is facilitated through interlinked transactions between these entities.
5. Concerns About the Genuineness of the Capital: Such a circular and interconnected setup raises significant concerns about the genuineness of the capital being raised through the GDRs. It suggests that the capital may not represent genuine investment interest from independent external investors but rather an orchestrated series of transactions designed to give such an appearance. This can mislead shareholders, regulators, and the market about the financial health and investor interest in Asahi, potentially inflating the company’s stock value artificially.
6. True Identity of the Investors Could not be ascertained – as far as the nature of fraud alleged is concerned, according to SEBI the investors of GDR of Asahi were found to be Messers Greenwich Management Inc and Tradetec Corporation. Greenwich was stated to have paid 29,82,000 USD for the purchase of 14,91,000 GDRs and Tradetec Corporation paid 30,00,000 USD for 15,00,000 GDRs. It is further pointed out that while Greenwich claimed to have its office at Hong Kong and Tradetec at Singapore, inspite of its best efforts, SEBI could not contact both the addresses furnished by the above investors as it turned out ultimately that the addresses were non-existent or the said addresses do not belong to them. It also came to the knowledge of SEBI that the said investors had investments in several other GDRs of Indian Companies.

The situation described above suggests that investors were led to believe the GDRs issued by Asahi were in high demand and fully subscribed by independent parties. However, the reality was that the subscriptions were made by entities connected to Pan Asia, with these entities receiving financial assistance from sources also linked to Pan Asia. This crucial detail, indicating a lack of genuine external investor interest and potential manipulation of the GDR issuance, was not disclosed to Indian investors, affecting the transparency and integrity of the investment process. This complex arrangement, therefore, not only obscures the true nature of the transactions but also potentially contravenes principles of transparency and fairness in financial markets, raising red flags for regulatory authorities like SEBI regarding the legitimacy of the capital raising exercise and the potential manipulation of market perceptions and valuations.

Respondent’s Reliance on FEMA, RBI Circular and 1993 Scheme

SEBI has no subject matter jurisdiction over GDR though the powers under FEMA regulations/schemes and RBI directions and the authorities specified may have jurisdiction to act and certainly not SEBI on the subject matter. Negatively the office manual of SEBI has nothing to do with the subject matter of GDR.The learned senior counsel therefore contended that the GDRs will definitely fall within the definition of “foreign security” as defined in section 2(o) and “security” as defined in Section 2(za) and consequently with reference to any violation in dealing with the GDRs can be exclusively dealt with under the provision of FEMA and the SEBI or any of the provision of SEBI Act, 1992 will not have any application relating to GDRs. Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (in short “2000 Regulations”) in particular Regulation 4, 5.1 along with Schedule I (4B), 5 and 6.

The respondent counsel also put his reliance on master circular on foreign investment in India dated 01.07.2011 of the RBI with particular reference to paragraph 8(F) of the said circular which deals with issues of shares by Indian companies under ADR/GDR as well as the form prescribed under Annexure 11 of the said circular by which the quarterly return are to be filed by the issuing company. The learned senior counsel pointed out that such procedure has been prescribed under the master circular under the provisions of the FEMA which takes care of the issuance of GDRs including two way fungibility provided under the said circular.

Clarification 23 in the RBI guidelines for the limited two way fungibility under the 1993Scheme as well as the guidelines for ADR/GDR issues by the Indian companies under Euro issue and submitted that the issuance of GDR by the issuing company and dealt with by the respondent(s) as Lead Managers fulfil all the requirements under FEMA, RBI Guidelines, 2000 Regulations under FEMA as well as1993 Scheme and, therefore, there was no scope for SEBI to proceed against the respondents under the provisions of the SEBI Act, 1992 or SCR Act, 1956.

The above reliance exclusively on FEMA, RBI Circular and 1993 Scheme was not accepted by the court.

Lead Manager Role – …In other words, the issuance of GDRs based on ordinary shares deposited with theDomestic Custodian Bank depends upon the issuing companiesdesire for raising of foreign funds. In order to fulfill its desire,while issuing the GDRs based upon the underlying sharesdeposited with the Domestic Custodian Bank through the overseas Depository Bank, the prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India has to be obtained. In that process, the Lead Manager plays a pivotal role as in consultation with the Lead Manager, the completion of finalization of issue structure by the issuing company is made subject however to the final approval for proceeding ahead with the issue from the Department of Economic Affairs.

…

Again the Lead Manager plays a key role in relation to the issues viz., public or private placement, number of GDR to be issued, the issue price etc., in consultation with the issuing company.
(on page 37 & 38 of the case)

Judgement – SEBI is entitled to invoke its jurisdiction under Section11, 11B, 11C, 12 and 12A of the SEBI Act, 1992 read along with its2003 Regulations

Global Depository Receipts (GDRs) and their integration with the Indian market.

1. What Are GDRs?
   • GDRs are financial instruments issued by a company that allow investors to hold shares of that company in a foreign currency.
   • They are typically traded on foreign stock exchanges, making them accessible to international investors.
   • GDRs represent ownership in the form of depository receipts, which are backed by actual shares held by a depository bank.
2. How GDRs Work:
   • A company issues GDRs to raise capital from international investors.
   • These GDRs are listed and traded on foreign exchanges (such as the London Stock Exchange or NASDAQ).
   • Each GDR typically represents a certain number of underlying shares of the issuing company.
   • Investors can buy and sell GDRs like regular stocks, but in a foreign currency.
3. Conversion to Shares:
   • When an investor wants to convert their GDRs into actual shares, a process called “conversion” occurs.
   • The depository bank facilitates this conversion by exchanging the GDRs for the equivalent number of shares.
   • These converted shares are then subject to trading on local exchanges (such as the Bombay Stock Exchange or BSE) in the domestic currency (Indian Rupees, in this case).
4. Integration with the Domestic Market:
   • Once the GDRs are converted to shares, they become part of the local stock market.
   • Indian investors can now buy and sell these shares on the BSE or other Indian exchanges.
   • This integration allows Indian investors to participate in the company’s growth and benefit from any dividends or capital appreciation.
   • It also provides a mechanism for foreign companies to raise funds from Indian investors without directly listing on Indian exchanges.

In summary, GDRs bridge the gap between foreign investment instruments (traded on international exchanges) and the domestic market (where Indian investors can participate). The conversion process ensures seamless access for investors, allowing them to engage with global companies while trading in their local currency.

Please explain the meaning – In the case of redemption, Overseas Depository Bank makes a request to the Domestic Custodian Bank to get the corresponding underlying shares released in favour of the non-resident investor for being sold directly on behalf of the non-resident or being transferred in the books of account of the issuing bank in the name of the non-resident. That is the manner in which GDR is dealt with after its creation and that is how the rights in favour of the holder of GDR is created after its transfer in his favour

Please explain the meaning of the following – In the case of redemption, Overseas Depository Bank makes a request to the Domestic Custodian Bank to get the corresponding underlying shares released in favour of the non-resident investor for being sold directly on behalf of the non-resident or being transferred in the books of account of the issuing bank in the name of the non-resident. That is the manner in which GDR is dealt with after its creation and that is how the rights in favour of the holder of GDR is created after its transfer in his favour

Explaination – This passage describes a process related to the redemption of Global Depository Receipts (GDRs), which are financial instruments used by non-resident investors to invest in shares of a foreign company without dealing with the complexities of foreign stock markets. Here’s a breakdown of the meaning:

1. Redemption Process: When a non-resident investor decides to redeem (or “cash in”) their GDRs, a specific process is followed. Redemption, in this context, means that the investor wants to convert their GDRs back into the original shares.
2. Overseas Depository Bank (ODB): This is a bank situated outside the country where the issuing company is based. It holds the shares corresponding to the GDRs and manages these receipts on behalf of investors. When an investor wishes to redeem their GDRs, the ODB initiates the process.
3. Request to the Domestic Custodian Bank (DCB): The ODB makes a request to the DCB. The DCB is a bank located in the same country as the issuing company, holding the actual shares represented by the GDRs. This request is to release the specific number of underlying shares that correspond to the GDRs being redeemed.
4. Release of Underlying Shares: Upon receiving the request from the ODB, the DCB releases the corresponding underlying shares. These shares are then either:

• Sold directly on the stock market on behalf of the non-resident investor, OR
• Transferred into the books of account of the issuing company in the name of the non-resident investor.

1. Rights Creation for GDR Holder: Through this process, the rights associated with the underlying shares (e.g., voting rights, dividends) are created in favor of the non-resident investor who holds the GDR, following its transfer to their name. Essentially, this means that once the GDR is redeemed and the shares are transferred to the investor, they gain all the rights associated with those shares.

In summary, this passage outlines the procedure for a non-resident investor to convert their GDRs back into the original shares, either for selling those shares in the market or transferring them to their own name, thus gaining all associated shareholder rights. This process involves coordination between the Overseas Depository Bank and the Domestic Custodian Bank to ensure the seamless transfer of rights from the GDR to the underlying shares.

What is the two way fungibility of the GDRs

The concept of “two-way fungibility” in the context of Global Depository Receipts (GDRs) refers to the ability of an investor to convert GDRs into the underlying shares of the issuing company, and vice versa, under certain conditions. This characteristic allows for flexibility and liquidity in how investors can manage their holdings. Let’s break down the two directions of this conversion process:

1. From Shares to GDRs: Investors or the issuing company can deposit shares of the company into a depository bank, which then issues GDRs against these shares. These GDRs can be traded on international stock exchanges, offering investors a way to invest in the company without having to deal directly with the shares in the company’s home market. This process makes the company’s shares more accessible to international investors.
2. From GDRs to Shares: Conversely, investors holding GDRs have the option to convert these receipts back into the underlying shares. This could be for several reasons, such as wanting to directly own shares for voting purposes, or if they anticipate that trading the shares directly in the domestic market could be more advantageous.