The Central Government has recently accepted the Sahoo Committee Report which recommends review of the existing regulatory regime relating to the issuance of ADR/GDRs by Indian companies. The Report proposes certain major regulatory changes, although it does not discuss the FCCB regime. The Committee has recommended that all kinds of issuers of securities, whether private or public, listed or unlisted companies, mutual funds or investment trusts, be allowed to access the DR market. DRs will be allowed to be issued on all kinds of securities as opposed to the earlier condition of DRs being permissible only for listed shares of public companies. While the move is laudable, DRs are often listed abroad and a free access to all kinds of issuers without any Indian regulatory interference would increase risks of fraud, thereby endangering the reputation of the Indian capital market. Further, the Committee has recommended allowing both sponsored DR programs where issuer companies sponsor the issue and raise fresh capital through the issuance, and unsponsored DR programs where a security holder, without any formal arrangement with the issuer company, may sponsor a DR programme for the securities held by the holder. The Committee recommends that securities issued to foreign depository for creation of DRs shall have the same pricing restrictions that may be applicable to a domestic investor. This would imply that pricing restrictions applicable under the current FDI policy will not be applicable to DR programs and issuers would be free to price their securities for issuances of DRs. Under the current FDI policy, investment through ADR/GDR is treated as FDI and is subject to pricing restrictions. DRs should be subject to FDI restrictions in case of acquisition of DRs representing more than 10% of equity capital of issuer companies. Pricing flexibility should only be accorded for portfolio investments constituting not over 10%, and any larger or strategic investment made through DRs should be subject to pricing norms. The Committee opined that SEBI, being the securities market regulator, is the appropriate authority to investigate market abuse related to DRs on the back of securities, as designed in the Securities Contracts (Regulation) Act, 1956. The view of the Committee is contrary to the ruling of Securities Appellate Tribunal in Pan Asia Advisors Limited case of 2013 where SAT found that DRs are governed by rules framed by Ministry of Finance and SEBI does not have jurisdiction over market abuse in DRs. Mr. S. Ravindran, representative of SEBI on the Committee has also dissented in the Report and observed that SEBI has jurisdiction only over companies whose securities are listed or are proposed to be listed on Indian stock exchanges.

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Date:September 29, 2015