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Voting rights of holders of depository receipts abroad

By Neha Yogi

Depository Receipts (DR) are negotiable securities issued outside India by a depository bank against underlying rupee shares that are issued by a company incorporated in India. The DR can represent a fraction, single or multiple shares of an Indian issuer company (‘the Company’). Issuance of DRs to non-resident investors is allowed under the prevailing FDI Policy of India read with the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000, issued under the FEMA, 1999. The Company is required to comply with the provisions of the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 (“DR Scheme”) and guidelines issued thereunder by the Central Government from time to time.

DRs are tradeable on overseas stock exchanges - those traded in the US are termed as 'American Depository Receipt' (ADR) and those traded in any other overseas country such as Singapore, Luxemburg and UK are called 'Global Depository Receipt' (GDR). As per the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, 'American Depository Receipt' (ADR) means a security issued by a bank or a depository in United States of America (USA) against underlying rupee shares of a company incorporated in India; whereas 'Global Depository Receipt' means a security issued by a bank or a depository outside India against underlying rupee shares of a company incorporated in India.

Voting rights on ADRs and GDRs

Voting rights on equity shares to be issued under the DRs shall be primarily governed by the provisions of the Companies Act, 1956 (or the Companies Act, 2013 when notified), The Companies Act states that every member of a company whose name is entered in the register of members of the company, shall have a right to vote on every resolution placed before the company. In case of a company limited by shares, the member shall be a person holding the equity share capital of a company and whose name is entered as beneficial owner in the records of the depository.

For issuance of the DRs, the Company has to appoint a Domestic Custodian Bank (DCB) and an Overseas Depositary Bank (ODB). The Indian Company issues the underlying shares with the ODB, whose name is entered in the register of members of the Company, and deposited with the DCB. The DCB holds it on behalf of the ODB who is instructed to issue the DRs to the non-resident investors against the underlying shares held with the DCB, in terms of a tripartite agreement entered into between the ODB, the DR holders and the Company. The record of the DR holders is to be maintained by the ODB. There is no lock-in requirement for the DR and the same may be exchanged for the underlying shares at any time as  requested by the DR holders, in which case, the ODB shall request the DCB for the release of the underlying shares in favour of the DR holders. As such, the ultimate beneficial holders of the shares underlying the DRs are identified by the Company when the DRs are redeemed, i.e. when the DR holders exchange such DRs for the underlying shares. Consequently, their names are entered as the beneficial owners of the shares in the register of members of the Company at this juncture and not at the time when the DR’s are issued. The Ministry of Corporate Affairs has clarified vide Circular No. 1/2009 dated 16 June 2009 (similar provision in the draft rules re: Companies Act, 2013) that the ODB is to be entered in the register of members since the underlying shares are allotted to it by the company

Further, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) provides that when ‘an acquirer’ by himself or by persons acting in concert with him acquires shares or voting rights which entitles them to exercise 25% or more of the voting rights in the company, he shall make a public announcement of an open offer for acquiring such shares. Clause (q) of Regulation 2 of the Takeover Regulations defines ‘persons acting in concert’ to mean persons who with a common objective of acquiring control over the target company, through agreement or understanding, whether formal or informal, who directly or indirectly co-operate for acquisition of shares or voting rights in the target company Associated companies are deemed to be persons acting in concert unless the contrary is proved.

It is important to note that the definition of ‘shares’ under the Takeover Regulations includes depository receipts carrying an entitlement to exercise voting rights in the target company. This means, if two or more DR holders agree in writing or otherwise to act as persons acting in concert with each other and with an intention to acquire control over the target company, convert their respective ADRs/GDRs into underlying shares together which shall entitle them to hold 25% or more of the voting rights in the company; in such a case, they shall as a group make a public announcement for open offer in accordance with the Takeover Regulations. But, on the other hand, if an individual DR holder acquires 25% or more of the voting rights in the target company, then he shall comply with the obligation of making a public announcement for open offer.

It can be deduced from the above that the entitlement of the DR holders to exercise the voting rights shall be subject to the conversion of ADRs/GDRs into underlying shares up to the limit prescribed under the Takeover Regulations and adhere to the compliance required therein. However, if on conversion, the ADR and GDR holders acquire shares which entitle them to less than 25% of the voting rights in the target company, they need not comply with the Takeover Regulations. The underlying shares to which the DRs shall be converted will or will not carry voting rights, will be pre-decided by the issuer company and should be in the knowledge of the DR holders.

[ The author is an Associate, Corporate Practice, Lakshmikumaran & Sridharan, New Delhi ]  
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