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ADR/ GDR/ FCCB Issues
A.P.
(DIR Series) Circular No. 52 dated 23rd November 2002
Attention
of the authorised dealers is invited to A.P. (DIR Series) Circular No. 21 dated
February 13, 2002 enclosing therewith a copy of the Notification No. FEMA
41/2001-RB dated March 2, 2001. In terms of Regulation 4B of the said
Notification, an Indian company may sponsor an issue of ADRs/ GDRs with an
overseas depository against shares held by its shareholders at a price to be
determined by the Lead Manager, subject to compliance with provisions of the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme, 1993 and guidelines issued
by the Central Government from time to time.
2.
The Operative Guidelines for Dis-investment of shares by the Indian
companies in the overseas market through issue of ADRs/ GDRs as notified by the
Government of India, Ministry of Finance vide Notification No. 15/ 23/ 99-NRI
dated 29th July 2002 are enclosed.
3.
Government of India, Ministry of Finance has also issued Press Note No.
15/ 4/ 2002 - NRI on July 8, 2002 (copy enclosed) regarding utilisation of ADR/
GDR/ FCCB proceeds in the first stage acquisition of shares in the Dis-investments
process and also in the mandatory second stage offer to the public, in view of
their strategic importance.
4.
Authorised dealers may bring the contents of this circular to the notice
of their constituents concerned.
5.
The directions contained in this circular have been issued under Section
10 (4) and Section 11 (1) of the Foreign Exchange Management Act, 1999 (42 of
1999).
GUIDELINES
FOR ADR/ GDR ISSUES BY THE INDIAN COMPANIES - DIS-INVESTMENT OF SHARES BY THE
INDIAN COMPANIES IN THE OVERSEAS MARKET THROUGH ISSUE OF ADRS/ GDRS
(i)
Divestment by shareholders of their holdings of Indian companies, in the
overseas markets would be allowed through the mechanism of Sponsored ADR/ GDR
issue in respect of:
(a)
Divestment by shareholders of their holdings of Indian companies listed
in India;
(b)
Divestment by shareholders of their holdings of Indian companies not
listed in India but which are listed overseas.
(ii)
The process of divestment would be initiated by such Indian companies
whose shares are being offered for divestment in the overseas market by
sponsoring ADR/ GDR issues against the block of existing shares offered by the
shareholders under the provisions of these guidelines.
(iii) Such a facility would be available pari-passu to all
categories of shareholders, of the company whose shares are being sold in the
ADR/ GDR markets overseas. This would ensure that no class of shareholders gets
a special dispensation.
(iv)
The sponsoring company, whose shareholders propose to divest existing
shares in the overseas market through issue of ADRs/ GDRs will give an option to
all its shareholders indicating the number of shares to be divested and the
mechanism how the price will be determined under the ADR/ GDR norms. If the
shares offered for divestment are more than the pre-specified number to be
divested, shares would be accepted for divestment in proportion to existing
holdings.
(v)
The proposal for divestment of the existing shares in the ADR/ GDR market
would have to be approved by a special resolution of the company whose shares
are being divested.
(vi)
The proceeds of the ADR/ GDR issue raised abroad shall be repatriated
into India within a period of one month of the closure of the issue.
(vii) Such ADR/ GDR issues against existing shares arising out
of the divestment would also come within the purview of the existing SEBI
Takeover Code if the ADRs/ GDRs are cancelled and the underlying shares are to
be registered with the company as shareholders.
(viii) Divestment of existing shares of Indian companies in the
overseas markets for issue of ADRs/ GDRs would be reckoned as FDI. Such
proposals would require FIPB approval as also other approvals, if any, under the
FDI policy.
(ix)
Such divestment inducting foreign equity would also need to conform to
the FDI sectoral policy and the prescribed sectoral cap as applicable.
Accordingly the facility would not be available where the company whose shares
are to be divested is engaged in an activity where FDI is not permitted.
(x)
Each case would require the approval of FIPB for foreign equity induction
through offer of existing shares under the ADR/ GDR route.
(xi)
Other mandatory approvals such as those under the Companies Act, etc. as
applicable would have to be obtained by the company prior to the ADR/ GDR issue.
(xii) The issue related expenses (covering both fixed expenses
like underwriting commissions, lead managers charges, legal expenses and
reimbursable expenses) for public issue shall be subject to a ceiling of 4% in
the case of GDRs and 7% in the case of ADRs and 2% in case of private placements
of ADRs/ GDRs. Issue expenses beyond the ceiling would need the approval of RBI.
The issue expenses shall be passed onto the shareholders participating in the
sponsored issue on a prorata basis.
(xiii) The shares earmarked for the sponsored ADR/ GDR issue may be
kept in an escrow account created for this purpose and in any case, the
retention of shares in such escrow account shall not exceed 3 months.
(xiv) If the issues of ADR/ GDR are made in more than one tranche,
each tranche would have to be treated as a separate transaction.
(xv)
After completing the transactions, the companies would need to furnish
full particulars thereof including amount raised through ADRs/ GDRs, number of
ADRs/ GDRs issued and the underlying shares offered, percentage of foreign
equity level in the Indian company on account of issue of ADRs/ GDRs, details of
issue parameters, details of repatriation, and other details to the Exchange
Control Department of the Reserve Bank of India, Central Office, Mumbai within
30 days of completion of such transactions.
(xvi) The tax provision under Section 115 AC of the Income Tax Act
1961, which is applicable to non-resident investors for ADR/ GDR offering
against issue of fresh underlying shares would extend to non-resident investors
investing in foreign exchange in ADRs/ GDRs issued against disinvested existing
shares, in terms of the relevant provisions of the Income Tax Act, 1961
(xvii) Resident shareholders divesting their holdings will be subject
to Capital Gain tax provisions applicable under the Income Tax Act 1961 i.e.
Section 115 AC applicable for non-residents would not extend to them.
GUIDELINES
FOR EURO ISSUES
Government
has received some suggestions regarding permitting use of ADR/ GDR/ FCCB
proceeds to acquire shares of PSUs under the Dis-investments programme of the
Government. As per the current guidelines, there are no endues restrictions for
ADR/ GDR/ FCCB proceeds other than the existing ban on investment in real estate
and stock markets.
2.
The suggestion is that in view of the impending large-scale Dis-investment
of PSU stocks in the near future, Indian bidders would be required to mobilise
huge sums of money for purchasing such stocks. The domestic bidders might suffer
from two structural constraints. One relates to the restriction on bank
financing to capital market and another relates to exposure limits to borrowers.
Therefore, attention has been drawn to the prohibition of end-use of proceeds of
ADRs/ GDRs/ FCCBs/ ECBs. The view is that this prohibition not only puts
restrictions on Indian bidders in the first stage offer to the Government, but
also to fund the second stage of mandatory public offer under SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997.
3.
In view of the Government�s policy to promote the Dis-investment
programme of PSU shares, the matter has been reconsidered.
4.
In view of the above, a view has been taken that ADR/ GDR/ FCCB proceeds
could be used in the first stage acquisition of shares in the Dis-investment
process and also in the mandatory second stage offer to the public, in view of
their strategic importance.
5.
These modifications shall come into effect after the date of issue of
these guidelines.
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