In this blog post, Aditya Arora, a student pursuing B.A. LLB from Jindal Global Law School and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details how the income received on GDR is taxed.  


Global Depository Receipts (GDR) are negotiable financial instruments issued outside India by a depository bank on behalf an Indian Company. The entity holding Depository Receipts have an interest in the shareholding of the company similar to that of an ordinary shareholder. The rationale behind issuance of such receipts are to increase the global presence of the company in order to expand the capital infusion by inducing foreign buyers. It provides an access to the Indian companies to foreign trading platforms. The concept of GDR became famous in India in early 1990s, which also became the sole source of foreign investments in Indian Companies. Global Depository Receipt therefore is a negotiable security issued outside India by a foreign depository to the foreign investors against an underlying interest which is subsequently deposited with a custodian in India.

The entity holding a Global Depository Receipts has rights at par with that of a common shareholder with regard to dividends and capital gains and can be transferred or sold like  any other security. This in turn allows the trading of securities of a company in other country, barring all the barriers attached to it such as exchange rate, accounting practices, language, etc.

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The issuance and trading of Global Depository Receipts were earlier governed under the ‘Foreign Currency Convertible Bonds and Ordinary Shares Scheme 1993’ which was subsequently replaced with the introduction of ‘Depository Receipt Scheme’ in 2014 as it wasn’t in consonance with the evolving financial markets. The salient features of the 2014 Scheme allowed a public as well as private company to trade its underlying permissible securities such as shares, debt, etc. There was a specific mechanism laid down in the erstwhile scheme for taxing in case of conversion of GDRs into shares whereas the 2014 scheme didn’t address this issue of taxing on conversion of GDRs into securities or shares.


How Does it Work?

A Global depository receipt is issued and administered by a depository bank for the corporate issuer. It is based on a Deposit Agreement between the bank and the issuer specifying rights and duties of each of the parties, both to the other party and to the investor. It includes setting record dates, voting the issuer’s underlying shares, depositing the issuer’s shares in the custodian bank, the sharing of fees, and the execution and delivery or transfer and surrender of GDR shares.

The company shares are held by a custodian bank separately which is located in the home country of the issuer and holds the shares of the Global Depository Receipt for safekeeping. The depository bank then buys the shares of the company and deposits it with the custodian bank while issuing GDRs representing an ownership interest in the shares.

The custodian bank in such circumstances are selected by the depository banks which also collects the dividends and forwards the communications received from the issuer to the depository bank, which sends them to the GDR holder.


Taxing of GDRs

Under FEMA

Global Depository Receipts are one of the ways to directly subscribe to another Company’s capital in India by the non-residents which in turn falls under the ambit of Foreign Direct Investment (FDI) and therefore various sectoral caps apply to such issue of shares as set by the finance ministry. The Companies are subsequently eligible to issue GDRs as per the sectoral caps laid down. Therefore, in order to understand the tax regime, it is important to determine the possible ways where the investor can divest his GDRs. The non-resident investor has the following options in order to divest the investment made in the capital of an Indian company without triggering the FEMA:

  1. As per the regulations laid down under FEMA, a non-resident Indian can transfer the GDRs to another non-resident Indian by either selling it or as a gift.
  2. A non-resident Indian is also allowed to gift his GDRs to a resident Indian. Furthermore, the Non-resident has the option of either getting the GDR converted into shares and sell it subsequently or get the GDRs converted abroad and transfer the shares to an Indian.
  3. The third option lying with a non-resident Indian holding GDRs is to get it converted into shares and then trade it in the Indian Stock Market. There are no specific restrictions laid down under the FEMA guidelines apart from certain procedural guidelines.


From the abovementioned options that are available with a non-resident Indian in order to divest the GDRs, once the Situs of the Depository Receipts is concluded to be in India, the individual can be taxed in the following manner as per the guidelines of FEMA:

  1. As discussed above, on the event where a non-resident transfers the GDRs to another non-resident Indian in foreign exchange, it triggers Section 115AC of the Income Tax Act and can subsequently be taxed under the same. But as per the exemptions laid down under Section 47 of the Income Tax Act, it relieves such transfer as doesn’t fall under the ambit of capital gain to be taxed in India.
  2. In the event of the non-resident wishes to transfer the GDRs to a resident Indian, the exemption laid down under Section 47 of the Income Tax Act fails to apply and therefore the transfer will be taxed under the Income Tax Act. Such transfer will fall under the ambit of section 115AC of the Income Tax Act and will be taxed depending upon the nature of the capital gain. However, if the transfer is made in the form of a gift to a resident India, it will have implications on the latter as gifts received are taxed under section 56 of the Income Tax Act.
  3. The third option in the hands of a non-resident Indian is to get the GDRs converted into shares and then trade it in the Indian Stock Market. Though this sounds simple, this is the most complicated option out of the three mentioned above. The first step in this option is to convert the GDR into shares. Since GDR and Shares are two different instruments with different rights, risks involved, etc, therefore surrendering GDR into shares from the perspective of the values derived out of it is taxable in India.

Another perspective of this conversion that will attract the Income Tax Act is that on conversion the class of equity may shift from A to B or vice versa which has its own gains and rights. Therefore, the gains accruing from such transfers may also attract the Income Tax Act.

The second step where the GDR is converted into equity shares and are up for sale in the Indian Stock Market, it clears the ambiguity with regard to the situs of the shares which is India. Therefore, depending upon the nature of the gain, the sale will attract the provisions of the Income Tax Act. If there is a long term gain from the sale, it will be exempted from tax under Section 10(38) of the Act, whereas short term gain will be taxed @ 15%.


Under Income Tax Act

Any form of income generated from any securities issued by an Indian Company especially GDRs is taxed under section 115 (AC) as well as section 115 (aca) of the Income Tax Act. It lays down the tax liability on the subscriber depending upon the nature of gain. Under this section of the Income Tax Act, if the nature of gain is ‘long term’ the income is charged at a concessional rate of 10%.  Similarly, section 115ACA also applies to the gains from the dividends accrued from the GDRs. “Section 115AC similarly taxes the income from DR’s to a non-­resident at a concessional rate of 10%. The non-Resident, further need not file his return of income if he has only income covered under this section taxable in India and appropriate TDS has been deducted on the said income. Further since the DR is just a change in nomenclature of shares any transfer/ surrender of DR during a course of amalgamation/demerger under section 47 should not attract the term ‘Transfer’.”



From the above mentioned provisions, though it facilitates the Indian companies to extend its investments from different countries, the procedure involved seems to be very chaotic when it comes to its conversion. The process of conversion of GDRs into shares isn’t that easy as it seems as it involves many procedural issues varying from currency rate to the accounting principles. Though there lies a vested interest of making such harsher rules and regulations as well as taxation policies, it discourages the Non-Resident Indians to invest in such kind of securities.



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