Government May Allow Depository Receipts Against Debt

Technological advancements have made the world smaller. With securities market going global, trading in international markets has become easy.  Companies that previously raised capital in the domestic market can now look for foreign sources of investment. Indian companies have listed American depository receipts (ADRs), global depository receipts (GDRs) and foreign currency convertible bonds (FCCBs) in the overseas markets like New York, London etc to raise funds from international investors. 

In his interim budget speech, finance minister P Chidambaram said that the government will comprehensively revamp the American depository receipt and global depository receipt scheme and enlarge the scope of depository receipts. 

At present, the Indian economy issues ADR and GDR to foreign investors against the underlying value of shares. The finance ministry is working towards increasing the scope of issuing foreign listed company securities by Indian firms against debt. Beside this, the government will also give voting rights to the ADR and GDR receipt holders. This will allow foreign investors to participate in the decision making of Indian companies. This will also aid in increasing the confidence of the overseas investors and raise long-term funds from international markets, providing growth opportunities to Indian companies. The government has also allowed the unlisted companies to list in foreign exchange. Prior to this, the Indian unlisted companies were not allowed to raise funds from outside. 

Currently, the companies raise funds from overseas in the form of external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs). The FCCBs mean a bond issued by an Indian company is expressed in foreign currency and the principal and interest is payable in foreign currency. ECBs refer to commercial loans in the form of bank loans from non-residents for a minimum average maturity of 3 years. The major concern from raising funds from ECBs and FCCBs is that there is foreign currency risk and also the requirement of a minimum lock-in period. 

The problem increases when the FCCBs are redeemed at a huge premium. For example, JP Associate raised USD 400 million (in year 2007) through FCCB and paid USD 523.5 million (September 2012), which was equivalent to Rs 2890 crore to the bondholder while redeeming the FCCB. As the company's market price of the share was lower than the redemption rate, it had to redeem at a premium of 47.01% by paying USD 169.1 million. It means that if the company has raised Rs 100, it had to return Rs 147 to the FCCB holder. This will be eliminated if the depository receipts (DRs) are allowed in the debt. 

The depository receipts are made taking into account the foreign inflation and currency fluctuations. This will help investors to earn profits without worrying about currency fluctuations and an investor will get liquidity benefit. The establishment of depository receipt against debt will also increase visibility and investor base in the international market. This will not only benefit the company, but will also help investors.