The government has relaxed the client verification process (KYC) requirement under the Prevention of Money Laundering Act to invite greater participation from foreign investors. As per the government’s notification, the overseas investors, who want to place money in the depository receipts of Indian companies, would not be required to do any separate KYC process and can buy DRs based on the proof of identity from their country of origin.
The market experts stated that the decision would expectedly make it easier for domestic companies to raise money abroad. Depository receipts are debatable certificates issued by a bank representing shares in an overseas company traded on a local stock exchange. The DRs allow an investor to hold shares in the equity of other nations. Indian firms like ICICI Bank, Infosys, Tata Motors, Wipro and MakeMyTrip have their DRs listed on US stock markets.
The liberalization of DR Scheme
The official with the foreign custodian bank said that government paved the way for a new issue of depository receipts. Last month, FM Nirmala Sitharaman said that the depository receipts scheme 2014 would be operationalized shortly by SEBI to enable local firms to access foreign funds through ADRs and GDRs.
According to reports, the finance ministry liberalized the scheme in 2014 under the leadership of former FM late Arun Jaitley. Under the scheme, any Indian firm, listed or unlisted, is allowed to issue depository receipts. It also permits the issue of unsponsored depository receipts that are issued without specific approval of the issuer of underlying securities. However, the scheme was never fully operationalized, becoming the most significant setback for Indian corporate.
Sandip Bhagat, a partner at S&R Associates- a law firm, stated that the amended rule would work well for the listing of DRs in the western markets, but might not make the cut for private placements. He added that the KYC requirements based on home country requirements are a great idea where the securities are traded publicly, as the regulatory oversight is high for markets involving public investors or retail.