FOREIGN EXCHANGE & MANAGEMENT LAW

ASSIGNMENT

ON

“GLOBAL DEPOSITORY RECEIPTS FOR FDI IN INDIA”

FOR

ENDTERM SUMMATIVE ASSESSMENT

SUBMITTED TO:

ASSISTANT PROF. AMRIT SUBHADARSI

PREPARERD BY:

YASHVARDHAN SHARMA

SEMESTER-IX-A

ENROLLMENT NO: 20190401096

1
 Table of Contents

Abstract.................................................................................................................2

Research Questions...............................................................................................3

Objectives.............................................................................................................4

Research Methodology.........................................................................................4

Introduction...........................................................................................................4

Literature Review.................................................................................................6

Evolution of GDRs in the Indian Context............................................................9

Regulations governing DRs in India...................................................................10

Recent Trends in GDRs in India.........................................................................12

Conclusion..........................................................................................................13

Bibliography.......................................................................................................14

2
Abstract

This paper examines the function of Global Depository Receipts ("GDRs") as a type of
Foreign Direct Investment ("FDI") within the financial environment of India. Indian firms are
increasingly turning to global development reports in order to attract foreign investment as a
result of the ongoing economic liberalisation. The paper investigates the historical
development of geographic data regions in India, providing an explanation of their
establishment and legal frameworks. In addition to this, it investigates recent advances and
the difficulties that have been encountered in the Indian setting.

In the context of economic liberalisation, Indian firms are progressively using GDRs as a
strategic move to attract foreign investment. This is being done within the framework of
economic liberalisation. In this study, important insights into the current position of GDRs as
a type of FDI in India are provided during the course of the discussion. Policymakers,
investors, and corporate organisations that are interested in acquiring informed knowledge
regarding this financial mechanism can benefit greatly from this resource since it serves as a
significant resource. The same conclusion was reached after investigating the regulatory
framework that governs Depository Receipts (also known as “DRs”) and the most recent
advancements in the operation of DRs and GDRs in the Indian context.

Keywords: Depository Receipts, Global Depository Receipts, Foreign Direct Investment,

Financial System, FEMA

3
Research Questions

1. How has the use of Global Depository Receipts evolved over time in India,
considering the ongoing process of economic liberalization?
2. What are the regulatory frameworks governing the issuance and trading of GDRs in
the Indian financial market, and how have these regulations evolved over time?

Objectives

1. To analyse the historical evolution of GDRs under Foreign Exchange in relation to

economic liberalisation.
2. To investigate the impact of legal frameworks and the procedures involved in
establishing GDRs.

Research Methodology

1. An extensive literature review was conducted to understand the history and

development of GDRs in India.
2. A study of financial reports and case studies was to analyse adoption patterns and
challenges faced by Indian firms implementing GDRs.

4
Introduction

In recent times, corporations are increasingly opting for cross-listings on international stock
exchanges to expand their global presence. This tendency results from the requirement for
substantial funding. Increasing global integration of the securities market and rapid economic
liberalisation facilitate this transformation. Listings across international borders employ both
direct and indirect methods.

Direct listing is when a firm sells its common shares without an IPO. Because direct listing
does not require underwriting banks, issuers can save money by not paying them large
commissions. DRs like GDRs and ADRs are issued for indirect listing. 1 DRs are domestic
bank-issued foreign business share ownership instruments.

DRs are transferable securities issued on behalf of an Indian corporation by a Depository

bank outside India to reflect equity shares held by the Custodian bank denominated in Indian
Rupees. Additionally, London, Singapore, Luxembourg, and the United States all trade DRs.
GDRs are listed internationally, whereas ADRs are traded and listed domestically. India
considers DRs to be FDI.2

Organisations, especially from poor economies, depend on DRs to expand globally. Domestic
firms cross-list to increase customers, funds for internal investments, stock liquidity,
worldwide recognition, and values. Indian firms can only cross-list through ADRs or GDRs.
They can also list masala bonds 3 on overseas markets. Foreign companies listed on Indian
markets must use Indian Depository Receipts.

Many Indian companies, particularly IT firms, favoured ADRs/GDRs “in the late 1990s and
early 2000s: as a means to increase share prices and attract foreign investors. Nonetheless,
this trend is reversing.4 Indian officials worry that the GDR method might help convert illegal
cash, a major drawback.5 This method has been used to send monies to India, taking
advantage of the system. International authorities have linked unlawful GDR fund
investments to investor losses unconnected to geopolitical conflicts or political upheaval.

1
“Nichholas C. Howsson and V.SS. Khannaa, “The Coming Race to List in Emerging Markets and an Improved
Understanding of Classical Bondiing, 47, Noo. 3 (2014) Cornell Int’l L. J. pp. 607-629””
2
“Reseve Bank of India. 2011, Mastersss Circular on Foreign Investment in India, Reserve Bank of India,
https://www.rbi.org.in/commonperson/English/Scripts/n Notification.aspx?Id=856”6
3
s. 390 of the Companies Act, 2013 (India)”
4
“”Rajesh MasarehasIndian Firm Loses ADR/GDR Charm, The Economic Times (2015)””
5
“Surajit Gohssal, Repatriation of Black Money-India’s Cherished Dream Amidst the Challenges of
International Regulations., 3 IJIMS 47, 47-58 (2016)”6

5
While direct listings of Indian firms overseas provide several benefits, the government and
authorities are wary due to capital outflow worries that may hurt the home primary market.
Allowing direct foreign company listings on Indian stock markets raises concerns about
diverting indigenous investment. However, SEBI intends to allow unlisted Indian
corporations to immediately list their equity share capital on overseas markets and vice versa.
An Expert Committee6 examined legal, operational, regulatory, and economic considerations
related to direct listings to evaluate this idea.

Literature Review

6
“Press Releases, Securitis and Exchange Board of India (2018), Exprt Commitee for Listing of Equity Share
Capita of Companies Incorporated in India on Foreign Exchange and Vice Versa (12-6-2018)”

6
Sr Nature of Name of Research Gap in Intended
No. Literature Literature Covered/Review Literature Research

Jayaraman, N.,
Shastri, K., & The literature lacks Research
Tandon, K. (1993). an in-depth focused on
American examination of the understanding
Depositary specific mechanisms the nuanced
Receipts evidence through which ADR effects of ADR
on international This study explores listings impact listings on
cross-listing risk- the risk-return impacts domestic stock developing
return impacts. of international cross- patterns, nation stock
Journal of Banking listing using American considering risk and
Journal & Finance, 17(1), Depositary Receipts disclosure domestic stock
1 Article 91-103. (ADRs). restrictions. patterns.

Research aimed
The literature from at assessing the
Kumar introduces 2004 provides an long-term
Indian Depository initial overview but impact of IDRs
Kumar, Manoj. Receipts (IDRs) and lacks a on Indian firms
(2004). discusses their comprehensive and their role in
Introducing Indian implications, analysis of the long- contributing to
Depository highlighting that some term implications of India's
Receipts. Stock firms are aggressively IDRs on Indian economic
Exchange Review, exploring firms and their acceleration
BSE April 2004. opportunities beyond performance in relative to other
Working Available at SSRN: their home financial international emerging
2 Paper [link]. markets. financial markets. economies.

3 Brief Ramasamy K.V. Ramasamy discusses The literature Research

Report (2007). Raising the factors influencing provides insights focused on
Funds in India: the performance of into the understanding
The Indian Indian Depository determinants of IDR the marketing
Depository Receipt Receipts (IDRs), performance but dynamics

7
Sr Nature of Name of Research Gap in Intended
No. Literature Literature Covered/Review Literature Research

influencing
IDR
performance
lacks a detailed and investor
examination of the interest,
emphasizing the role marketing strategies contributing to
Option. ISAS Brief of marketing and that influence IDR efficient IDR
No. 14. investor interest. success. utilization.

Research aimed
Kadapkakam, P.- at
R., & Misra, L. The literature understanding
(2003). Indian discusses the impact the nuanced
Stocks and London of dual listing but factors
Global Depository Kadapkakam and lacks a affecting
Receipts: Misra explore the dual comprehensive arbitrage
Arbitrage- listing return linkages analysis of the restrictions in
Restricted Dual between Indian stocks factors influencing dual listings
Listing Return and London Global arbitrage restrictions and their
Linkages. The Depository Receipts and their consequences
Journal Financial Review, (GDRs), highlighting implications on on return
4 Article 38, 611-633. arbitrage restrictions. return linkages. linkages.

5 Online Giridharan. (2006). Giridharan discusses The literature Research

Resource Desi depository the achievement of briefly mentions focused on a
receipt achieved. Desi Depository IDR criteria but detailed
Retrieved from Receipts (IDRs), lacks an in-depth analysis of IDR
[link]. emphasizing their examination of their criteria,
strict criteria and strictness and the balancing
importance for global practicalities market trust,
stock market involved. and practical
convergence. considerations

8
Sr Nature of Name of Research Gap in Intended
No. Literature Literature Covered/Review Literature Research

for achieving
global stock
market
convergence.

Research aimed
at providing a
comprehensive
This statement serves The literature analysis of the
as an introductory overview lacks characteristics
Indian financial overview, specific details on and future
markets' emphasizing the the characteristics prospects of
characteristics and significance of Indian and future trajectory Indian financial
future are of financial markets in of Indian financial markets in the
importance due to the context of markets, presenting era of
economic economic an opportunity for economic
- Overview liberalisation. liberalization. further exploration. liberalization.

Evolution of GDRs in the Indian Context

India established IDRs in 2004 to attract international securities market investment after
deregulation. Under the “1956 Companies Act, the Companies (Issue of Indian Depository
Receipts) Rules, 2004,” control IDRs. IDR issuance ended after 5-6 years. Standard
Chartered Bank distributed IDRs May 25–28, 2010. Businesses collecting financing using
IDRs must follow strict guidelines. In the three preceding financial years, companies with
$50 million in “pre-issue paid-up capital, free reserves,” and market capitalization qualified.
These strict criteria precluded several companies from issuing IDRs on Indian stock markets.
ADRs trade in the US, GDRs internationally. GDRs and FDI are considered by India.

9
GDRs are regarded as deposits between the bearer and the issuing bank, with a custodian
bank holding GDR firm shares. GDRs are equity-based negotiable securities acquired and
deposited by the depository bank with the custodian bank.

GDRs, ADRs, and FCCBs can be issued by Indian companies to raise cash abroad, with
limits. GDR holders can convert them into similar equity shares after a certain period. SEBI
is concerned about GDR round-tripping, even as prominent Indian companies use it to attract
foreign direct investment. To avoid financial constraints, firms transfer assets or cash as part
of a commercial contract to repurchase them later. GDRs, including ADRs, are subject to
SEBI monitoring due to their challenging monitoring nature and potential for facilitating
money laundering and market manipulation. Foreign participation through the simpler and
more cost-effective domestic Qualified Institutional Placement (“QIP”) has reduced
ADR/GDR preference.

Regulations governing DRs in India

FEMA Regulations and “the Central Government's Issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 7”
control ADR/GDR issuance.

The Indian government's guidelines, as updated, must be followed.8

7
“Isseue of Foreign Currency Convertible Bonds and Ordinary Share (Through Depositary Recipt Mechanism)
Scheme, 1993, Government of India, India.”
8
“Mnistry of Elctronics and Information Technlogy, 2000. Consolidated FDI Policy Circular of 2020,
https://www.meity.gov.in/writereaddata/files/FDI-PolicyCircular-2020-29October2020_0.pdf”

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 (A) DRs are issued in foreign currency by an authorised foreign depository in relation to
eligible assets. For domestic custody, securities are issued or transmitted to a foreign
depository.
(B) Qualified securities can be issued or transferred to foreign depository receipts under
the revised “Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 9.”
This method must follow Indian government and 2014 Depository Receipts Scheme
guidelines.
(C) A person qualified to issue eligible instruments to someone outside India can issue
DRs under the “Foreign Exchange Management (Non-Debt Instruments) Rules,
2019,” as amended.
(D) Non-Indians cannot hold more eligible securities issued or transferred to foreign
depositories than the FEMA, 1999 limit.
(E) International depository receipt securities must be valued as least as much as
comparable domestic securities under FEMA, 1999.
(F) Domestic custodians shall report DR Scheme 2014 depository receipts to the Reserve
Bank.

The government limits ADR/GDR two-way fungibility. This approach lets an Indian stock
broker buy Indian firm shares for foreign investors to convert into ADRs/GDRs. ADRs/GDRs
redeemed for Indian shares can be renewed.

A sponsoring ADR/GDR offering for the conversion of resident shareholders is possible for
an Indian company. The firm exports proceeds from the issuance of ADRs/GDRs overseas to
India. The funds are distributed to resident investors who converted their Rupee shares.
Domestic Foreign Currency (Domestic) accounts are permitted to possess shares that Indian
citizens have converted to ADRs or GDRs.

Additional GDR regulations include the 2014 Companies (Issue of Global Depository
Receipts) Rules.10 Depository receipts can be issued through private placements, public
offers, or other methods under certain regulations. Depository receipts can be traded
internationally.

Recent Trends in GDRs in India

9
“Foreign Exchange Management (Non-Debt Instrumens) Rules, 2019, (42 of 1999), Government of India,
India.”
10
“Companiess (Issue of Global Depository Recipts) Rules, 2014, Central Government of India, India.”

11
In 2019, SEBI banned Sanraa Media firms from influencing share prices utilising Global
Depository Receipts.11

For manipulating GDRs, SEBI barred 19 domestic and foreign entities from Indian securities
markets in 2017. Two of the six GDR manipulators, K Sera Sera Ltd. and Asahi Infrastructure
& Projects Ltd., were banned for ten years.12

SEBI advised 26 companies, including Euram, to adopt Indian market regulations. SEBI has
expanded its GDR abuse investigation, particularly in illicit money transfers to India. Over 50
people and companies are under regulator investigation. 13 SEBI's initial investigation
showed extensive GDR misuse to return suspected unlawful monies from abroad. Illegal
money laundering often involves rounding trips. Crisil revealed that 85% of Indian
enterprises' 40 global GDRs issued in 2010 lost investors' money, with four out of five losing
35% or more.14 12 Indian companies issued Rs 940 crores ($0.2 billion) in GDRs in 2011,
compared to 34 in 2010. No Indian company sold shares in 2012–2013, while 29 foreign
bonds raised Rs 60,534 crores. Despite its 2000 launch, Standard Chartered issued its first
Indian Depository Receipts (IDRs) in May 2010.

However, the IDR market has faced challenges such lack of fungibility, rigorous qualifying
conditions, taxation ambiguity, little publicity, and concerns about regular investors receiving
50% of each issue.15 Companies are wary of market anomalies after SEBI GDR inquiries. A
more trustworthy market alternative is needed since only one foreign business has issued the
IDR.

Conclusion

As indicated in the introduction, FDI in India has been the subject of an in-depth analysis of
GDRs. GDRs' market manipulation and regulatory monitoring downsides must be
11
“Presss Trustt of India. (2019). GDR Issue: SEBI imposes a five-year ban on Sanra Media and seven others.
Mint. A widening investigation into the misuse of GDRs to route illicit funds is detailed in the article Sebi-
widens-probe-into-GDR-misuse-for-black-money.html (livemint.com)”
12
“KII Ltd. v. SEBI, 2018 SCC OnLine SAT 122.”
13
“Press Trustt of India. (2017). SEBI Expands GDR Misuse Probe for Black Money. Mint.
https://www.livemintt.com/Money/3C7eacYIzV556utxa3DzeL/Sebi-widens-probe-into-GDR-misuse-for-
routing-black-money.htmll”
14
“Eight-five percent of Indian GDRs fail. Business Line.
https://www.thehindubusinesslinee.com/markets/stock-markets/85-of-indian-gdrs-fail-to-deliver/
article64173694.ecee”
15
“Press Trust of India (2013). According to Crisil, 85% of GDRs issued last year lost investors money.
Business Standard. https://www.business-standard.com/article/markets/investors-lose-money-in-85-gdrs-issued-
last-year-crisil-111092700191_1.htmll”

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considered with their benefits. To strengthen GDR regulation, policymakers, regulators, and
market participants must understand these obstacles. GDR benefits such foreign direct
investment and higher share prices must be weighed against misuse and regulation. The
Securities and Exchange Board has addressed these issues, but regulatory improvements are
ongoing to ensure GDR issuers operate securely and transparently.

Policymakers should review “the Companies (Issue of Global Depository Receipts) Rules,
2014” to address new issues and adapt regulatory frameworks to market realities. Regulators,
market actors, and businesses must promote and defend foreign investment. Capital-infusion
companies considering GDRs must address ethics, risk reduction, and regulation. Due
diligence, information, and engagement with authorities can boost GDR issuers' reputation
and financial environment.

GDRs may increase FDI as India invites international investment. Indian companies'
flexibility in employing GDRs for global growth and strategic financing shows capital market
resilience.

Bibliography

1. Nichholas C. Howsson and V.S. Khanna, "Reverse Cross-Listings-The Coming Race

to List in Emergng Markets and an Enhanced Understandng of Classical Bonding," 47
Cornell Int’l L. J. 607-629 (2014).
2. Rajesh Mascarenhas, "ADRs/GDRs Lose Charm for Indian Firms," The Economic
Times (2016).
3. Surajit Goshal, "Repatriation of Black Money- India’s Cherished Dreams amidst the
Challenge of International Regulatons," 3 IJIMS 47, 47-58 (2016).

13
4. Jayaraman, N., Shastri, K., & Tandon, K., "The impact of international cross listings
on risk and return: The evidence from American Depository Receipts," Journal of
Banking & Finance, 17(1), 91-103 (1993).
5. Kumarr, M., "Depositary receipts: concept, evolution and recent trend," Evolution and
Recent Trends (2006).
6. Ramaswamy K.V., "Raising Money in Indian Markets -The Indian Depository
Receipts Option," ISAS Brief No. 14 (2007).
7. Kadapakkam, P.-R., & Misra, L., "Return Linkages between Dual Listings under
Arbitrage Restrictions: A Study of Indian Stocks and their London Global Depository
Receipts," The Financial Review, 38, 611-633 (2003).
8. Giridharan, "Dream of desi depository receipts comes true," retrieved from
http://www.icai.org/resource_file/8145IDR.pdf.
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Circular of 2020," https://www.meity.gov.in/writereaddata/files/FDI-PolicyCircular-
2020-29October2020_0.pdf.
10. Press Trust of India, "GDR Issue: SEBI Bars Sanraa Media, 7 Others for 5 Years,"
Mint (2019), https://www.livemint.com/Money/3C7eacYIzV556utxa3DzeL/Sebi-
widens-probe-into-GDR-misuse-for-routing-black-money.html.
11. Press Trust of India, "SEBI Widens Probe Into GDR Misuse for Routing Black
Money," Mint (2017),
https://www.livemint.com/Money/3C7eacYIzV556utxa3DzeL/Sebi-widens-probe-
into-GDR-misuse-for-routing-black-money.html.
12. "85% of Indian GDRs Fail to Deliver," Business Line (2011),
https://www.thehindubusinessline.com/markets/stock-markets/85-of-indian-gdrs-fail-
to-deliver/article64173694.ece.
13. Press Trust of India, "Investors Lose Money in 85% GDRs Issued Last Year: Crisil,"
Business Standard (2013),
https://www.business-standard.com/article/markets/investors-lose-money-in-85-gdrs-
issued-last-year-crisil-111092700191_1.html.
14. Press Trust of India, "StanChart IDR Issue to Open on May 25, Gets RoC Nod," The
Economic Times (2010),
https://economictimes.indiatimes.com/industry/banking/finance/banking/stanchart-
idr-issue-to-open-on-may-25-gets-roc-nod/articleshow/5922816.cms.

14
15. PwC India, "Foreign Direct Investment Manual," available at
https://www.pwc.in/assets/pdfs/fdimanual.pdf.
16. Press Release, Securities and Exchange Board of India (2018), "Expert Committee for
Listing of Equity Share Capital of Companies Incorporated in India on Foreign
Exchanges and Vice Versa (12-6-2018)."
17. Reserve Bank of India, "Master Circular on Foreign Investment in India," 2011,
available at https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?
Id=856.

15