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India needs to review Depositary Receipt regulations to remain a top investment destination, says BNY Mellon

India’s drive to lure investors from overseas received a boost in 2012 with the adoption of the Qualified Foreign Investor initiative, but to remain one of the world’s top investment destinations the nation should review its depositary receipt (DR) regulations, says BNY Mellon in its new report, ‘India: Easing Conditions for Investors’.

India’s first depositary receipt programme for Reliance Industries was established in 1992. Since then, only 13 Indian corporate have established American Depositary Receipt programmes. As a result, consensus is growing amongst the global investment community that India needs to consider re-evaluating its DR rules to stay abreast of evolving markets.

Gregory Roath, BNY Mellon’s Asia-Pacific head of depositary receipts, says: “We are often asked, especially by US investors, to establish ADR programmes for Indian companies but are restricted from doing so by current regulations. There is significant international demand for Indian equity in the form of DRs that simply cannot be satisfied via the routes now available. Many investors prefer the familiarity and convenience of DRs, are unable to invest directly, or are unable or unwilling to use derivatives.”

A review of public filings in 2012 shows that nearly half of all global funds that invest in India using depositary receipts choose not to invest directly through ordinary or local shares.

BNY Mellon believes introducing over-the-counter (OTC) non-capital-raising ADR programmes for Indian companies could solve this challenge. It met recently with the Ministry of Finance, SEBI, and the Reserve Bank of India to discuss the merits of this proposal and how it might benefit India and Indian corporates. In permitting OTC non-capital-raising DRs, India would join 67 other countries that provide investors with access in this way, including Brazil, South Korea, South Africa and Turkey.

Cynthia Tusan, CFA, President of Strategic Global Advisors, LLC, which has USD440 million in international equity assets under management, says: “We are very interested in any new ADRs available for companies based in India. We invest in India but generally, we can only access that market through ADRs since most of the accounts we manage, even the institutional accounts over USD25 million do not have custody capability in India. We find the number of ADRs available for India to be extremely limited.”

Neil Atkinson, head of BNY Mellon’s Indian Depositary Receipts business, says: “It’s been over 20 years since the first DR programme from India was established, and while it is clear the elephant can already dance, we think the time is right to learn some new steps. We believe allowing Indian companies to attract foreign investment via non-capital-raising ADRs will create the access investors crave and encourage foreign investments, helping to meet India’s economic objectives and creating value for India’s corporates.”

DRs play an essential role in cross-border trading and are a preferred instrument both for companies listing their shares on global markets and investors seeking international portfolio diversification. Not only do they broaden the range of investors who participate in capital markets, but adding a DR programme can also enhance the liquidity of an issuer’s securities.

Since the 1920’s, investors, companies, and traders have used DRs to meet their needs. According to data from BNY Mellon, the global leader in depositary receipts, as of 31 December 2012 there are over 3,500 DR programmes available to investors, representing issuers from 81 countries. More than 3,300 institutions invest almost USD700 billion in DRs globally.

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