Indian Depository Receipts - New Model Listing Agreement

Indian Depository Receipts – New Listing Agreement

Indian Legislature and Securities and Exchange Board of India (SEBI), vide Companies (Issue of Indian Depository Receipts) Rules, 2004, Chapter VIA of the SEBI (Disclosure & Investor Protection) Guidelines, 2000 and the Model Listing Agreement for listing of Indian Deposit Receipts (IDR) in April 2006 had set up the necessary regulatory structure in place for raising of funds from Indian Capital Markets by foreign companies through the Depository Receipt mechanism. However, not a single foreign company utilized this mechanism though the Indian Capital Market was one of the best performing markets during the relevant time.

The merchant bankers and market participants attributed this ‘no show’ to the tough entry (minimum turnover, profitability and operations) disclosure requirements and a Model Listing Agreement proposed for listing of IDR which was drafted on the lines of the Listing Agreement applicable to Indian companies seeking listing on Indian stock exchanges. This Model Listing Agreement had put dual continued listing compliance responsibilities on a company issuing IDR with the possibility of incompatible differences between the home country compliance requirements and the Model Listing Agreement requirements.

However the new global economic scenario wherein it is expected that countries from Asia, especially India and China, will lead the economic recovery has again raised the hopes of putting back life into the IDR. At the same time, Indian regulatory authorities have recognized the need to bring some flexibility in the regulatory structure in order to increase the attractiveness of the Indian regulatory and compliance mechanism so that foreign companies are induced to issue and list IDRs in India. India has some examples to follow to bring in the required flexibility like the mechanism provided by European Union in their Markets in Financial Instruments Directive (MIFID).

As per the MIFID provisions, an investment firm can provide services throughout EU on the basis of home country supervision. This concept has been given the name Passport whereby a company operating in various countries will continue to be regulated as per the provisions of the home country regulations.

Relying on a similar concept, Indian regulators have given recognition to the regulations of home countries provided those countries are signatory to Multilateral Memorandum of Understanding (MMOU) of International Organization of Securities Commissions (IOSCO).The new Model Listing Agreement for IDRs is applicable only to those companies whose home country is a signatory to MMOU of IOSCO. The new agreement gives recognition to the existing compliance requirements of the home country. So the new agreement does not impose additional responsibilities on an IDR issuer to meet India specific compliance provisions if such provisions are already covered by the home country’s compliance requirements. All the issuer has to do is to make the disclosures simultaneously with its home country regulator and Indian regulators. The new agreement thus avoids a situation that we find in case of those Indian companies who’s ADRs or GDRs are listed on American or European stock exchanges, whereby they disclose more information about their performance in foreign markets than in the domestic market.

An analysis and comments on the provisions of the new listing agreement are as below:

1. The stock exchanges would need to equip themselves with country specific compliance provisions to ensure that what the IDR issuer has done is as per the home country regulatory provisions.
2. Notice period for the purpose of different corporate actions like bonus, rights, split, and dividend for the IDR issuers has been reduced to 7 days from 15 days as applicable to Indian companies. This is a welcome measure since companies prefer to keep the record dates near to the announcement date.
3. The fixing of record date in consultation with Indian stock exchanges may create some conflict in ensuring compliance with the home country requirements and there will be less of maneourability due to reduction in the notice period to 7 days.
4. The new agreement provides a provision for arbitration in case of a dispute with a stock exchange. This is a new provision having no precedent for Indian companies. It will be interesting to see the effectiveness of this provision if and when it gets invoked
5. An IDR issuer needs to comply only with the Corporate Governance provisions as applicable in the home country and is required to file a comparative analysis of the Corporate Governance provisions applicable in Indian market.  
6. The IDR issuer need to appoint a CS in India to ensure compliance with Capital Market regulatory provisions. 

----Ruchira Gupta

Advocate

The Juris Sociis, Bangalore

ruchira@thejurisociis.com