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This article has been written by Hritika Jannawar, pursuing a Diploma in Companies Act, Corporate Governance, and SEBI Regulations from LawSikho.


Keeping a portfolio as diversified as possible is the thumb rule to reduce the risk in capital market transactions. Investors have always tried to find out a more feasible way to prevent them from concentrating their Portfolio in a single holding sector. Whereas when this motive of diversification leads them to foreign markets they are often discouraged due to lots of regulations and compliance work to invest directly in foreign markets and also the whole process deems to be expensive. The way to avoid this problem and still be able to have foreign investment in one’s Portfolio is the ‘Depository Receipts’ (DRs). This financial instrument makes it possible for a potential investor to easily tap into the global markets. And also for a company to showcase its potential by listing its Depository Receipts on foreign stock exchanges. Depository receipts also help stimulus arbitrage. The investors often take advantage of this when the DRs listed on the foreign stock exchange has increased, the demand for the price of the shares in the domestic market also soars high, resulting in some investors converting their DRs into underlying shares and then selling that shares at a price higher in the domestic market of the Company whose shares are sold. The regulations of the countries play pivotal roles in such transactions, more the restrictive outlook by the Government would lead to fewer opportunities to tap the global market. 

In India, the laws and regulations that govern ‘Depository receipts’ are Companies Act, 2013, Companies (Issue of Global depository receipts) Rules, 2014, and Securities and Exchange Board of India Act, 1992.

This article discusses the meaning of depository receipts under the Companies Act and then further dives into a discussion of the history of rules regarding voting rights of the holders of depository receipts and the present status of the same after the recent SEBI circular.

What are depository receipts?

A depository receipt (DR) is a negotiable certificate which is a mirror image (or issued on behalf) of underlying shares of a foreign company in the custody of a bank in that foreign jurisdiction, and in turn, the depository banks overseas issue depository receipts which is listed and traded on their local stock exchange.

Depository receipts are widely recognized as ‘ADR’ (American depository receipts) and ‘GDR’ (Global depository receipts). To explain these concepts let us consider an example of an Indian company ‘BHIM Ltd’ now this company wishes to enter into US market to attract American investors, So BHIM Ltd would contract with a custodian bank in India and an overseas depository bank i.e. in America and issue ADRs for underlying shares of BHIM Ltd in the custody of Indian custodian bank. Now the ADRs of BHIM Ltd will be listed and traded on the US stock exchange. Similarly, if BHIM Ltd had wished to list such depository receipts in the European market or any other part of the globe they are known as GDR.

The Companies Act, 2013 defines GDR in Section 2 (44) as follows –

Global Depository Receipt” means any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorized by a company making an issue of such depository receipts.” Companies Act includes ADR under the definition of GDR.

Procedure for Issuing depository receipts

Rule 4 of the Companies (issue of Global Depository receipts) Rules, 2014 prescribes the procedure to issue GDR as follows –

(1) The Board of Directors of the company intending to issue depository receipts shall pass a resolution
authorising the company to do so.
(2) The company shall take prior approval of its shareholders by a special resolution to be passed at a
general meeting:
Provided that a special resolution passed under Section 62 for the issue of shares underlying the depository
receipts shall be deemed to be a special resolution for the purpose of Section 41 as well.
(3) The depository receipts shall be issued by an overseas depository bank appointed by the company and
the underlying shares shall be kept in the custody of a domestic custodian bank.
(4) The company shall ensure that all the applicable provisions of the Scheme and the rules or regulations or
guidelines issued by the Reserve Bank of India are complied with before and after the issue of depository
(5) The company shall appoint a merchant banker or a practising chartered accountant or a practising cost accountant or a practising company secretary to oversee all the compliances relating to the issue of depository receipts and the compliance report is taken from such merchant banker or practising chartered accountant or practising cost accountant or practising company secretary, as the case may be, shall be placed at the meeting of the Board of Directors of the company or of the committee of the Board of directors authorised by the Board in this regard to be held immediately after closure of all formalities of the issue of depository receipts:

Provided that the committee of the Board of directors referred to above shall have at least one independent director in case the company is required to have independent directors.

Voting rights associated with depository receipts

Depository Regulations have a long history of regulations in India. It was initially governed by the Foreign Currency Convertible Bonds and Ordinary shares (Through depository receipt mechanism) Scheme, 1993 (1993 scheme), this scheme had a narrow scope wherein only listed companies were eligible to issue DRs. Then the Sahoo Committee was set up under the chairmanship of Mr. M.S Sahoo who took the comprehensive review of the 1993 scheme and proposed regulations, deregulations, and widening scope of these regulations so that Indian Companies will be able to tap the global market easily.

The recommendations of the Sahoo Committee were adopted in the ‘Depository Receipt Scheme, 2014’ (2014 scheme). In the 1993 scheme only listed companies were eligible to issue DRs and not unlisted. But the scheme of 2014 widened its scope in this perspective wherein all the companies whether listed or unlisted, private or Public could issue DR’s. Furthermore, the scheme enumerated the possibility of the issue of sponsored and unsponsored DR.

Sponsored DR  

DR which is issued with the company’s co-operation, either by issuing fresh securities for keeping it in the custody of the domestic custodian bank or to help custodian banks to buy securities from existing shareholders to issue DRs corresponding to these securities in Foreign jurisdiction.

Unsponsored DR 

These are the DRs that are issued against the underlying securities which are acquired by the custodian banks from the existing shareholders without any interference from or aid of the Company.

The 2014 Scheme stipulated a restriction in the case of ‘Unsponsored depositary receipts issued on the back of listed permissible securities’ can be issued only if such DR’s gave the right to holders to issue voting instructions to the bank and should be listed on an international exchange (this is to be in compliance of minimum public shareholding) if this is not the case they are not computed for a public shareholding of the company.

The voting rights otherwise would be determined on the basis of contractual terms between depository banks and the holder of DRs i.e. whether the depository banks are entitled to exercise the voting rights or the exercise it according to the instructions of the holders of DR. However if the terms of the deposit agreement do not give holders any rights regarding issuing voting instructions to depository banks i.e. no rights voting rights to the holders of the DRs, the underlying securities will not be counted towards the public shareholding requirements.

In accordance with Rule 6 of Companies (Issue of Global Depository Receipts) Rules, 2014 if the deposit agreement does not grant the holder of DR any voting rights he will be able to get those only if he converts those DRs into the underlying securities.

However, the picture has changed pursuant to the recent SEBI circular dated October 10th, 2019. This circular was issued by SEBI in the exercise of powers conferred under Section11 (1) of the  Securities and Exchange Board of India Act, 1992. According to this circular the only eligible entity to issue DRs are the ‘Companies incorporated in India and listed on recognized stock exchange’ or ‘ the holders of the permissible securities of the listed companies can transfer their securities to issue DR against them’ and the scope of issuing DRs against Indian securities has once again been restricted to listed companies only.

Moreover, this circular mandates for a listed company to be ensured of the voting rights in an agreement entered by the holder of DRs, the Company, and the depository are with the holder of depository receipts i.e. the voting rights will be exercised by the DR holders through the Foreign depository.


In India, the regulations have taken a twist and turn to make the scope first narrower, then broader then again narrower. This SEBI circular has taken a departure from the 2014 scheme and unlisted companies are excluded from issuing DRs which gives rise to ambiguity in ascertaining the position of the unlisted companies till there are amendments made in the 2014 scheme. Also, the change is not only in the voting rights and eligible issuers but also in regards to the back of which type of securities the DRs can be issued i.e. permissible securities  in 2014 scheme has been defined to include Securities as defined in the Securities Contracts (Regulation) Act, 1956 whether issued by the company, government or mutual fund or any other issuer, but the SEBI circular prescribes permissible securities being only equity shares and debt securities in dematerialized form. Also, the underlying securities on whose back the DRs are issued have been excluded for the accounting of minimum public shareholding (which is currently 25%). The Circular is silent upon the unsponsored issue of DRs which was introduced by the 2014 scheme.

The system in 2014 scheme which has deemed to be given a discretionary proxy right to the depository bank to vote on behalf of depository holders in absence of any contractual terms stating otherwise have been restricted to the full extent because the circular stated that the voting rights on the permissible securities underlying DRs are to be compulsorily carried out by the depository bank pursuant to holder instruction and not by itself. This provision though brought some relief, there are many things left untouched by this circular and for that, the amendment in 2014 scheme is much sought to bring the law governing ‘Depository Receipts’  in the same line.


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