August 12, 2008
ADRs/GDRs: Price is right! & IDRs: MCA to ‘unlock’ the 1 year lock-in on conversion
Keeping in mind today’s grim global capital market scenario, the Government of India’s (“GoI”) Ministry of Finance (“MoF”), and more specifically the Department of Economic Affairs (“DEA”), in its release dated July 31, 2008, has proposed certain changes to the pricing of American Depository Receipts (“ADRs”) and Global Depository Receipts (“GDRs”) regime. We discuss the same below.
Coming to the rescue of the Indian corporates who are facing challenges in raising funds abroad, the DEA has proposed certain changes to the pricing norms prescribed under the ADR and GDR regime.
The current pricing norms as prescribed under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 (“Scheme”) state that the price per ADR/GDR should be the higher of the following:
The ‘relevant date’ in this context means the date thirty (30) days prior to the date on which the resolution authorizing such issuance is passed at a meeting of the shareholders of the issuing company as per Section 81(1A) of the Companies Act, 1956.
It is proposed that the six (6) months period as mentioned under “1” above, shall now stand reduced to two (2) months average price preceding the relevant date. It is further proposed to modify the definition of “relevant date” to mean the date on which the resolution authorizing the issuance is passed at the board of directors’ meeting of the issuing company as opposed to the date 30 days prior to the resolution passed at a shareholders general meeting.
IDRs: MCA to ‘unlock’ the 1 year lock-in on conversion
The Indian Depository Receipts (“IDRs”) regime was introduced through the Companies (Issue of Indian Depository Receipts) Rules, 2004 (“Rules”). In spite of their promulgation in 2004, the same haven’t gained much popularity. In order to make the IDR route more lucrative for foreign companies who wish to list on the Indian bourses, the Ministry of Corporate Affairs (“MCA”) has been in the continuous process of relaxing the Rules.
The Rules provide for a one (1) year lock-in period as determined from the date of the issuance of the IDRs for the purpose of their conversion into the underlying equity shares of the issuing company. This provision was included in order to restrict an investors’ early exit.
The MCA has proposed that the aforesaid one (1) year lock-in period on the conversion or redemption of the IDRs into equity shares should be removed.
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