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Published by Enhelion, 2020-05-19 08:51:50

Module 3

Module 3

MODULE 3

CAPITAL AND REVENUE PROCUREMENT

Every company strives for diversification, large profits, and corporate control in this globalised
world. FDI is an important source of capital procurement for Indian companies. The Indian
companies can raise equity capital through the issue of American Depository Receipts (“ADR”)
/Global Depository Receipts (“GDR”) /Foreign Currency Convertible Bond (“FCCB”) / Foreign
Currency Exchangeable Bonds (“FCEB”). This offers opportunities to companies looking for
access to international markets, management expertise, and growth in trade, economy and
business with a technological infusion. Foreign investor’s investment (“FII”) is different from
FDI in which the former is an institution established or registered outside India to make
investment in stock exchanges when they register and adhere to the rules of SEBI. Whereas, the
latter is the investment made to secure the interest of investor in the company which is other than
investor’s country of origin.

The FII’s are also allowed to participate in initial public offers. Moreover, it can be noted that
since June 2014 the Ministry of Finance and RBI have merged FII’s, QFI’s and FPI which has
lead to a revolution in the concept of FII’s which has now shifted to FPI’s.

3.1. REGULATIONS RELATING TO INVESTMENT IN INTERNATIONAL CAPITAL
MARKET

FCEB SCHEME,2008

GUIDELINE ISSUED DEPOSITORY
BY MINISTRY OF RECEIPTS SCHEME,
FINANCE OR
GOVERNMENT OF 2014
INDIA

REGULATIONS RBI REGULATIONS /
RELATED TO GUIDELINES /
CIRCULARS
LISTING

THE FCCB AND COMPANIES ACT,2013
ORDINARY SHARES

SCHEME,1993

Ø DEPOSITORY RECEIPTS (“DR”): Depository receipts is a means to access global
markets, raise capital The reason behind investment in depository receipts is to diversify
portfolio, avoid currency risk, avoid restrictions on dealing to simplify trading and
settlements for holding foreign securities in their markets. It is issued to set up a global
image, ESOP to increase recognition in international markets with a vision to diversify
share holder base or to facilitate merger and acquisition effectively.

Ø Depository Receipt can be of various types according to the listing and trading:

o ADR

o GDR

o EDR

Ø DEPOSITORY RECEIPT SCHEME 2014

Ø ADR AND GDR

3.2. INVESTMENT IN DEBT AND EQUITY

3.2.1. Debt investment
A debt investment typically offers a lower but consistent and committed return. They usually
tend to be safer than the equity investments. They are less capricious than common stocks. The
bond and mortgage market historically experiences fewer price changes, for better or worse, than
stocks. When the company is liquidated, the bondholders are paid first. Debt investment have
fixed and mentioned interest rates and they are usually backed up by real estate collateral.

3.2.2. Equity investment
Equity investments do not commit or provide a consistent return. They either help in making
fortunes or create loss. When the share market is volatile, rapid changes take place in the share
values. These wide price swings occur due to political, social or governmental issues in the
country of corporation, they are not based on solidity of an organization.

3.2.3. Difference between debt and equity investment



DEBT INVESTMENT EQUITY INVESTMENT

Debt Investments such as bonds and mortgages Equity investments, such as stock, are

specify fixed payments, including interest to securities that come with a “claim” on the

the investor. earnings and/or assets of the corporations.

Consistent return with low risk. High risk with less consistency.

Debt instruments are corporate borrowing. Equity investments offer an ownership position

in the company.

It is rightly said that “all investments come with risk.” One’s preference must depend on the
investment goals. It is necessary that one must tailor his investment actions to match his
objectives and risk tolerance.

3.3. WHO CAN INVEST?

A non-resident entity can invest in India, subject to the FDI Policy except in those
sectors/activities which are prohibited (as discussed in the previous module). However, an entity
of a country, which shares land border with India or where the beneficial owner of an investment
into India is situated in or is a citizen of any such country, can invest only under the Government
route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under
the Government route, in sectors/activities other than defence, space, atomic energy and
sectors/activities prohibited for foreign investment1.

Earlier, the FDI restriction was only upon Pakistan and Bangladesh, however on April 17, 2020,
the DPIIT revised the terms, and ensured that all countries who share a land border with India are
to be faced with such restrictions, thereby including China within the restricted investment area.
However, it is important to note that, no such restriction was imposed upon FPIs from border
countries.

investor (NRI/ proposed mode of Procedural Annual
non resident) activity in India Remittance Compliance at Compliance
( NRE, Inward
-prohibited Remittance time of
activites investment

-approval route
- automatic route



1 Press Note 3 of 2020 <https://dipp.gov.in/sites/default/files/pn3_2020.pdf> last accessed on 18 May 2020.

3.4. ENTITIES INTO WHICH FOREIGN INVESTMENT CAN BE MADE:
Following are the entities into which investment can be made by nonresident entity into India:

3.4.1. FDI in Indian company
3.4.2. FDI in Partnership Firm/ Proprietary concern

There are certain conditions as per the FDI Policy which needs to be fulfilled for investment into
firm/ proprietary concern. A non-resident as well as a person of Indian origin (“PIO”) resident
outside India can invest in the capital of the firm on the basis of non- repatriation.

3.4.3. FDI in Venture Capital Funds

Foreign Venture Capital Investors can invest in Indian venture capital undertakings (“IVCU”)/
Venture Capital Funds (“VCF”)/ other companies. However, a person resident outside India
either individual or a non- resident entity can invest in VCF subject, if a domestic VCF is set up
as trust, with the consent of FIPB. But if a domestic VCF is set up as an incorporated company
then a person resident outside India can invest under automatic route of FDI Scheme.

3.4.4. FDI in trusts

FDI in trusts other than VCF is not permitted.

3.4.5. FDI in LLP2

Reserve Bank vide Notification No. FEMA 298/2014-RB dated March 13, 2014 and A.P. (DIR
Series) Circular No. 123 dated April 16, 2014, included LLPs registered under Limited Liability
Partnership Act, 2008 as eligible entity to accept FDI. However, FDI in LLP is allowed through
government approval route.

FDI is allowed in LLP's operating in sectors/activities where 100% FDI is allowed under
automatic route and where there are no FDI linked performance related conditions (such as Non-
Banking Companies or Development of Townships, Housing and Built up infrastructure and
construction- development projects etc.). In other words, FDI is not allowed to LLP's operating
in sectors where approval of Foreign Investment Promotion Board (FIPB) is required or sectors


2 ‘Entities into which FDI can be made’ (Taxguru,18 March 2019) <https://taxguru.in/rbi/entities-fdi-made.html>
last accessed on 18 May 2020.

where 100% FDI is allowed under automatic route but has FDI- linked performance related
conditions to be met.

An Indian company, having FDI, will be permitted to make downstream investment in an LLP
only if both-the company, as well as the LLP- are operating in sectors where 100% FDI is
allowed, through the automatic route and there are no FDI-linked performance conditions.

LLPs with FDI will not be eligible to make any downstream investments.

Foreign Capital participation in LLPs will be allowed only by way of cash consideration,
received by inward remittance, through normal banking channels or by debit to NRE/FCNR
account of the person concerned, maintained with an authorized dealer/authorized bank.

In case the LLP with FDI has a body corporate that is a designated partner or nominates an
individual to act as a designated partner in accordance with the provisions of Section 7 of the
LLP Act, 2008, such a body corporate should only be a company registered in India under the
Companies Act, 2013 and not any other body, such as an LLP or a trust.

3.4.6. FDI in other entities

FDI in resident entities other than those mentioned above is not permitted.

3.5. FOREIGN CURRENCY CONERTIBLE BOND (“FCCB”)
With the plethora of bonds, funds, stocks etc along with its associated terms, the business and the
finance sector can get numbed with the entry of a newcomer.

3.5.1. What is Foreign Currency Convertible Bond?

FCCB are ‘Bonds’ inclusive in the definition of Debt Instruments:

“Debt-Instrument” means an instrument which creates or acknowledges ineptness, and includes
debentures, stocks, bonds and such other securities of a body corporate, whether constituting a
change on the assets of the body corporate or no.

Furthermore, Robert W. Hamilton in The Law of Corporations in a nutshell briefly states that:
“typically debt securities are debentures and bonds. Technically ‘debenture’ is an unsecured
corporate obligation while ‘bond’ is secured by a lien or mortgage on the corporate property”

FCCBs are generally listed on national and regional stock exchanges to improve liquidity.

3.5.2. Features of the bond issue

Bonds constitute direct, unsubordinated obligations of the company and rank pari-passu inter se
with all other existing debts and borrowings of the company as regards repayment of principal
and payment of interest by the bonds issuing company.



REDEMPTION: (a) Redemption on Maturity - unless previously redeemed or purchased by the
company, the bonds are redeemed at par on the expiry of a pre-determined period from the date
of the allotment. (b) Put Option - When the Bondholder redeems the bonds after expiry of a
certain period commencing from the date of allotment, he is said to exercise the Put Option. (c)
Call Option - When the company purchases the bonds from the bondholders at discount, par or
premium in the open market or otherwise, the company is said to exercise its Call Option.Indian
corporates have started using these ‘convertible bonds’ in international market, commonly
known as “FCCB”

FEMA Notification No. 120/ RB-2004 i.e. Foreign Exchange Management (Transfer or Issue of
Any Foreign Security) Regulations, 2004, defines Foreign currency convertible bonds (FCCB’s)
under Regulation 2(g) which reads as: -

FCCB “means a bond issued by an Indian company expressed in foreign currency, and the
principal and interest in respect of which is payable in foreign currency.

3.5.3. How does it help companies?
They may seem to be more predictable and stable as compared to their domestic
currency.

Issuer can access investment capital in foreign markets.

Companies can use the process to enter into foreign markets.

These bonds act not only like a debt but also like an equity instrument.
Low cost debt (as interest rates given to FCCB are normally 30-50% lower than market
rate).
Conversion of bonds takes place at a premium price to market price.
Conversion price is static and is fixed when the bond is issued.
Lower dilution of company stocks.

3.5.4. How does it benefit an investor?
It is not only companies who attain benefits from FCCB but investors too enjoy some benefits:

Safety on payments on the bonds
Advantage can be taken on appreciation in the company’s stock.
If not converted they are redeemable on maturity.
Option of conversion into equity if it results to capital appreciation.
Easily marketable.

3.5.5. Disadvantage to investors and companies
Since the interest on bonds would be payable in foreign currency the exchange risk is
high.
FCCBs basically mean creation of more debt and a FOREX outgo in terms of interest
which is in foreign exchange.
Investors may go for redemption if the stock price plummets. And hence, companies will
have to refinance to fulfill the redemption promise which can affect earnings.

There is exchange risk on interest and principal even if the interest rate is low in case of
convertible bonds.

Till the time conversion doesn’t take place, it will be shown as a debt in the balance
sheet.

3.5.6. How taxation is done?
Taxation can be computed in the below mentioned ways:

On the bonds, one has to pay interest as these bonds are subject to deduction of tax at the
rate of 10% until they are converted.

There won’t be any rise in the capital if the FCCB is converted into shares and would be
liable to income-tax in India.

If a non-resident investor transfers his FCCB to another non-resident investor, it shall not
give rise to any capital gains liable to tax in India.

Tax can be exercised on dividends at 10%.

3.5.7. Requirements as prescribed by the several provisions of company law
FCCBs are bonds issued by an Indian company or anybody corporate expressed in
foreign currency to non-resident investors, which fall within purview of the definition of
debentures, and therefore the process for issue of debentures shall be applicable to the
issue of FCCBs. Prior intimation to be given to the Stock Exchange by the issuer
company listed at the Stock Exchange, atleast 7 days before the date of Board meeting in
which the FCCB issue is to be considered.

Power to issue FCCBs vests with the Board of Directors of the issuer company who are
obligated to pass a Board resolution pertaining to the issue of FCCBs.

The Board is also required to convene a General Shareholders Meeting for procuring the
shareholders consent with regard to the enhancement of borrowing powers of the Board,
acquiring authorisation for creating mortgage in case of issue of secured FCCBs or
obtaining shareholders’ approval on the further issue of the capital by way of FCCB
issue, without making an offer to the existing shareholders of the company by a Special
Resolution.

It is mandatory upon the companies intending to make public issue of FCCBs, to
constitute a Trust Deed for the bonds, to appoint a Trustee for the bondholders and to
create a redemption reserve account respectively as the company issues these Bonds to
the foreign investors in accordance with the provisions of the Trust Deed.

Role of SEBI – Pre-issue and Post-issue requirements & Conditions to be fulfilled by the Issuer
Company:

An application for listing of the Bonds has to be made to the stock exchange of the
country where the FCCBs are to be issued and traded i.e. international stock exchange.

‘In-principal’ approval has to be obtained from the Indian Stock exchange to list the
shares issued upon conversion of bonds, when the bondholder exercises the
convertibility option.

3.6. FOREIGN CURRENCY EXCHANGEABLE BONDS
Ministry of Finance, department of economic affairs issued the foreign currency exchangeable
bonds (FCEB) are regulated by foreign currency exchangeable bonds scheme.

3.6.1. What is FCEB?
1. a bond expressed in foreign currency

2. The principal and the interest in respect of which is payable in foreign currency

3. Issued by an issuing company, being an Indian company

4. Subscribed by a person resident outside India
5. Exchangeable into equity shares of another company, the offered company being an Indian
company.
6. Either wholly or partly or on the basis of any equity related warrants attached to debt
instruments.
It may be important to note that issuing company is to be part of promoter group of offered
company and the offered company is to be listed and to be eligible to receive foreign investment.
The launch of the foreign currency exchangeable bond (FCEB) scheme affords a unique
opportunity for Indian promoters to unlock value in group companies. FCEBs are another arrow
in the quiver of Indian promoters to raise money overseas to fund their new projects &
acquisitions, both Indian & global, by leveraging a part their shareholding in listed group
entities.
An FCEB involves three parties-
1. The issuer company (issuer),
2. The offered company (OC) and
3. Investor.

3.6.2. Eligibility criteria for subscribers of FCEB’s
Only person residents outside India can subscribe to FCEBs subject to compliance with
the FDI Policy.
Entities prohibited by SEBI from buying, selling or dealing in securities are not eligible
to subscribe to FCEBs.

3.6.3. Eligibility criteria for companies issuing FCEB’s
FCEBs can be issued only by Indian companies.

Issuing Company and the Offered Company are required to be part of the same Promoter
Group.
At the time of issuance of the FCEBs and until redemption or exchange, the Issuing
Company is required to hold the shares of the Offered Company into which the FCEBs
are exchangeable.
The Issuing Company must be eligible to raise funds in the Indian securities market and
shall not have been restrained by the Securities and Exchange Board of India (“SEBI”
) from accessing the securities markets. As discussed above, this may be interpreted to
mean that the Issuing Company must be listed.
The Offered Company must be listed on a stock exchange and must be engaged in a
sector eligible to receive foreign direct investment under the Government of India’s
foreign direct investment policy (the “FDI Policy”). · The Offered Company must be
eligible to issue FCCBs or avail of ECBs.

3.6.4. Difference between FCCB and FCEB
The essential difference between FCCB and FCEB lies in their convertibility whereby in the case
of an FCCB offering, the bonds covert into shares of company that issued the bonds, while in the
case of an FCEB offering, the bonds are convertible into shares not of the issuer company, but
that of another company forming part of its group.

3.6.5. Issue of foreign currency exchangeable bonds (FCEB) scheme, 2008
In the financial year 2007-08, the Indian Government notified the foreign currency exchangeable
bonds scheme, 2008 for the issue of FCEBs.

The provision of the scheme is an under:

Eligible Issuer: The issuing company shall be part of the promoter group of the offered
company and shall hold the equity share/s being offered at the time of issuance of FCEB.

Offered Company: The offered company shall be a listed company, which is engaged in a
sector eligible to receive foreign direct investment and eligible to issue or avail of foreign
currency convertible bond (FCCB) or external commercial borrowings (ECB).

Entities not eligible to issue FCEB: An Indian company, which is not eligible to raise funds
from the Indian securities market, including a company which has been restrained from
accessing the securities market by the SEBI shall not be eligible to issue FCEB.

Eligible Subscriber: Entities complying with the foreign direct investment policy and adhering
to the sartorial caps at the time of issue of FCEB can subscribe the FCEB. Prior approval of the
foreign investment promotion board, wherever required under the foreign direct investment
policy, should be obtained.

Entities not eligible to subscribe to FCEB: Entities prohibited to buy, sell or deal in securities
by the SEBI will not be eligible to subscribe to FCEB.

3.7. EXTERNAL COMMERCIAL BORROWING (“ECB”)
In simple terms, external commercial borrowing means money borrowed from foreign resources

It includes the following:

Buyers Credit and Suppliers credit

Commercial bank loans

Securitized instruments (like Floating Rate Notes and Fixed Rate Bonds etc.)

Credit from official export credit agencies and commercial borrowings from the private
sector window of Multilateral Financial Institutions such as International Finance
Corporation (Washington), ADB, AFIC, CDC etc.

3.7.1. Objectives
ECBs are permitted by the Government since they act as an additional source of
financing for expanding the existing capacity and also for fresh investments

ECB policy of the Government shows priority of investing in core sectors like Power,
telecom, Railways, Roads, Urban Infrastructure etc.

It also focuses on the need of capital for Small and Medium scale enterprises.

3.7.2. Difference in between ECB and FDI



ECB FDI

Any kind of funding other than equity. Foreign money used to finance equity capital.

ECB should satisfy ECB regulations Any investment made towards core capital of

stipulated by government or RBI. an organization like equity shares,

convertible preference shares or convertible

debentures.

Bonds, Credit notes, Asset Backed Convertible instruments are covered in FDI

Securities, Mortgage Backed Securities or policy.

any of that nature are included in ECB.

Direct capital is not allowed in ECB. Direct Capital is allowed.

3.7.3. Routes to access ECB
ECB in India can be accessed via two routes namely the Automatic Route and
Approval Route.

Under Automatic Route, the investment in industrial sector, infrastructure sector are
allowed. Approval of RBI or Government is not required.

However under the approval route, namely for specific sectors such as import and
export, the borrower has to take prior permission of the government before taking the
loan.

3.7.4. Benefits to borrower
ECB funding helps paying to suppliers in other countries etc that may not be available in
India for corporates.

Cost of funds at times borrowed from external sources is usually cheaper than domestic
funds.

It is the borrower who can diversify the investor base.

It opens international market for the borrowers.

3.7.5. Impact and implications on economy
The Government of India has a controlled policy on ECBs and via its policies; it would
like to make companies use the ECB to primarily fund the infrastructure and SME sector
of the economy.

The benefit for the economy is that the low-cost international funds can improve inflow
of more money in these sectors. Over the years, Indian companies have increasingly
dependent on ECB. Indian companies want to get loans through ECB at lower cost and
lower their cost of borrowing.

The External commercial borrowings increase the external debt of the country. That is
why it has to be matched with growth of foreign exchange reserves in the country so as to
maintain solvency.

Also increase in ECB is accompanied with increase in currency risk as there will be
depreciation in rupee, which will lead to increased burden on the borrower as the value of
the rupee depreciates. Thus, increased dependence on ECB is less favourable for

borrowing country’s view. If ECBs are not controlled, there can be huge debt causing
problems for economy.

3.7.6. Policy of the government
ECB policy seeks to keep an annual cap or ceiling on access to ECB, consistent with
prudent debt management.

It seeks to give priority for projects in core and infrastructure sectors such as Power, oil
Exploration, Telecom, Railways, Roads and bridges, IT Parks and also the export sector.

There are few companies which are allowed to raise ECB from any of the internationally
recognised sources like banks, ECA (export credit agencies), suppliers of equipment,
Capital markets etc.



3.8. INTERNATIONAL FINANCIAL MARKETS

“The real difficulty lies not in developing new ideas but in escaping from the old ones.”

- J.M. Keynes

International financial markets consist of international banking services and international money
market. Services included by the bank are trade financing, foreign exchange, foreign investment,
etc. International banks provide these banking services. International money market includes the
Eurocurrency markets, Euro credits, Euro notes, Euro Commercial Paper etc.

Financial market is a broad term describing marketplace were buyers as well as sellers come
together and participate in trade of assets like bonds, equities, derivatives and currencies.

These markets have transparent pricing, casts and fees, basic regulations on trading and market
forces determining the prices of securities that trade.

The financial market comprises the markets strictu sensu (stock market, bond market, currency
market, derivatives market, commodity market and money market), the institutions which work

in them with different aims and functions (Central Bank, Ministry of Economy and
Finance, Monte Tivoli, Borsa Italiana and CONSOB), as well as direct/indirect policies
orientated to making the market the place (not necessarily a physical place and not necessarily
ruled but regulated) where the exchange between surplus and deficit units is carried out as
efficiently as possible.

Financial markets like New York Stock Exchange (“NYSE”) and FOREX markets trade almost
trillions of dollars daily; however, there are some markets which have very few participants. But
financial markets can be found in almost every nation.

Investors while investing can have access to a large number of financial markets and exchanges
representing a vast array of financial products. There are few markets which are open to private
investors too.

3.9. CHALLENGES FACING FINANCIAL SECTOR IN THE TRANSITION TO A
MARKET ECONOMY

Implementing international standards into local legislation.

Building institutions.

Training employees

Educating society

Integrating into international financial organizations.

3.10. MARKET CAPITALIZATION
Representation of the aggregate value of a company is termed as Market Capitalization. By
multiplying the number of shares outstanding by the current price per share, market
capitalization can be obtained. In simple terms, market capitalization is the price at which you
can buy all the outstanding shares of the Company.

Example: if PQR company is having 15,000,000 shares outstanding and a share price of Rs. 20
per share then the Market Capitalization will be Rs. 300,000,000(15,000,000 x Rs.20).

Per- share price is virtually meaningless for those who follow the principles of value investing.

COMPANY X COMPANY Y
Stock Price Rs.50 Stock Price Rs.10
No. Of Shares = 50 Billion No. Of Shares = 300 Billion
Market Capitalization = rest. 2.5 Billion Market Capitalization = rest. 3 billion

Stocks are classified mainly on the grounds of Market Capitalization in India. Stocks are
classified on the basis of market capitalization like Large Capital, small capital, mid capital by
fund houses and investment professionals. However, in every approach market capitalization acts
as an indicator of a company’s size.

Different market caps behave differently and it is necessary to have knowledge about it. These
different market capitals have varying degrees of risk and potential returns.

A comparative account of mega- cap, large-cap, mid cap and small-cap companies.

PARAMETER MEGA CAP LARGE CAP MID CAP SMALL CAP
RISK low low High Very high
HIGH low low High High
RETURNS
LIQUIDITY Very good Very good Good Poor

Standard approach of classifying companies is given below:

1. MEGA CAP- Companies exceeding Rs. 20,000 Cr. as their market cap come under this
basket. They are usually blue chip stocks with strong brand recognition; Eg. ITC, SBI, Coal
India and others.

2. LARGE CAP- Companies with a market cap between Rs. 7,000 Cr. And Rs. 20,000 Cr.
Ashok Leyland and other well established companies fall into this category. Mega and Large cap
both are considered as secure and stable investment option.
3. MID CAP- Companies with market cap between Rs. 500 Cr. And Rs. 7, 000 Cr. come under
this basket. These companies are in there developing stage and their share capital is more volatile
as compared to large and mega cap companies. A significant portion of growth stocks are
represented in mid caps.
4. SMALL CAP- Companies having market capital up to Rs.500 Cr fall under this category.
Their track records won’t be as lengthy as other caps. There is a possibility of greater capital
appreciation but the degree of risk is high.

3.10.1. ADR/GDR
Raising equity capital has become one of a significant step. Indian companies are allowed to
raise equity capital in international market through the issue of GDR/ADR/FCCB/FCEB.
Issuance of these is regulated by the below mentioned regulations in India:
§ The Foreign Currency Convertible Bonds and Ordinary Shares (through depository receipt

mechanism) Scheme,1993.
§ Foreign Currency Exchangeable Bond Scheme, 2008.
§ Depository Receipt Scheme, 2014.
§ Notifications issued by ministry of finance, GOI.
§ Consolidated FDI Policy.
§ RBI Regulations/ circulars.
§ Listing Regulations
§ Companies Act and Rules hereunder

An American Depository Receipt is a dollar denominated form of equity ownership in the form
of depository receipts in a non- US company. It represents the foreign shares of the company
held on deposit by a custodian bank in the company’s home country and carries the corporate
and economic rights of the foreign shares.

GDRs are known as Global Depository Receipts have access to Euro market and US market.
Listing of GDR may take place in international stock exchanges such as NASDAQ, Luxemburg
Stock Exchange, American Stock Exchange, New York Stock Exchange, London Stock
Exchange etc.

3.10.1.1. Issue of ADR/GDR
In the Indian context, DRs are treated as FDI.

§ FCCB/ DRs may be issued in according with the Scheme for issue of Foreign Currency
Convertible Bonds and Ordinary Shares Scheme, 1993 and DR Scheme 2014 respectively, as
per the guidelines issued by the Government of India there under from time to time.

§ DRs are foreign currency denominated instruments issued by a foreign Depository in a
permissible jurisdiction against a pool of permissible securities issued or transferred to that
foreign depository and deposited with a domestic custodian.

§ In terms of Notification No. FEMA.20/2000-RB dated May 3, 2000 as amended from time to
time, a person will be eligible to issue or transfer eligible securities to a foreign depository,
for the purpose of converting the securities so purchased into depository receipts in terms of
depository receipts scheme, 2014 and guidelines issued by the Government of India there
under from time to time.

§ A person can issue DRs, if it is eligible to issue eligible instruments to person resident
outside India under section 1, 2, 2A, 3, 5 and 8 of Notification No. FEMA 20/2000- RB dates
May 3, 2000, as amended from time to time.

§ The aggregate of eligible securities which may be issued or transferred to foreign
depositories ,along with eligible securities already help by person resident outside India, shall

not exceed the limit on foreign holding of such eligible securities under the relevant
regulations framed under FEMA, 1999.

§ The pricing of eligible securities to be issued or transferred to a foreign depository for the
purpose of issuing depository receipts should not be at a price less than the price applicable
to a corresponding mode of issue or transfer of such securities to domestic investors under
the relevant regulations framed under FEMA, 1999.

§ The issue of depository receipts as per DR Scheme 2014 shall be reported to the Reserve
Bank of India by the domestic custodian as per the reporting guidelines for DR Scheme 2014.

3.10.1.2. Sponsored ADR/GDR issue
An issue of ADR/GDR can also be sponsored by an Indian company. The company offers its
resident shareholders a choice to submit their shares back to the company so that on the basis of
such shares, ADR/GDRs can be issues abroad. The proceeds of the ADR/GDR issue are remitted
back to India and distributed among the resident investors who had offered their rupee
denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency
accounts in India.

3.10.1.3. Provisions of companies act, 2013 relating to issue of GDR
The new Companies Act, 2013 under Section 41 and Companies (Issue of Global Depository
Receipts) Rules, 2014 has laid down provisions for issue of global depository receipts.

According to Section 2(44) 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 authorised by a company making an issue of such depository
receipts”.

Section 41 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.

3.10.2. Euro issue
It means modes of raising funds by an Indian Company outside India in Foreign currency. The
different modes of euro issue are as follows:
3.10.3. Depository receipt
Depository receipt is a negotiable instrument evidencing a fixed number of equity shares of the
issuing company being an Indian Company, denominated in foreign currency and is being traded
in foreign exchanges.


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