A.P. (DIR Series) (2002-2003) Circular No. 52, dated 23-11-2002
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 Disinvestment 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 disinvestment 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 - Disinvestment 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 pro
rata 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 115AC 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 115AC
applicable for non-residents would not extend to them.
F.No.15/4/2002-NRI,
dated 8-7-2002, issued by Ministry of Finance
Government
has received some suggestions regarding permitting use of ADR/GDR/FCCB proceeds
to acquire shares of PSUs under the disinvestment programme of the Government.
As per the current guidelines, there are no enduse 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 disinvestment 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 disinvestment 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 disinvestment 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.