SEBI's New Framework for Monitoring Foreign Holdings in Depository Receipts

Framework for Monitoring Foreign Holdings in Depository Receipts

Background

On October 10, 2019, SEBI notified a framework regarding the issuance of Depository Receipts by listed companies. The circular stipulated specific obligations for Indian Depositories and Domestic Custodians to monitor foreign holdings in accordance with prevailing laws.

Key Responsibilities of Indian Depositories and Domestic Custodians

As per the circular, Indian Depositories must create systems to track foreign holdings, including those represented by DRs. This includes:

Information Dissemination: Regular updates regarding the outstanding DRs and limits available for conversion must be shared.
Cooperation with Domestic Custodians: Necessary arrangements must be established with Domestic Custodians or Foreign Depositories.

Operational Guidelines

Following discussions with market participants, the broad operational guidelines are set forth in the Annexure to facilitate efficient monitoring of DRs. Stakeholders are encouraged to standardize formats and operational details as necessary.

Amendments and Notifications

Stock Exchanges and Depositories are directed to:

Amend relevant by-laws and regulations to implement this circular.
Communicate the circular’s provisions to issuers and Domestic Custodians and ensure it is available on their websites.

Authority

This circular leverages powers granted under Section 11(1) of the Securities and Exchange Board of India Act, 1992.

Annexure Details

Appointment of Designated Depository

Each listed company must designate one Indian Depository as the Lead Depository for monitoring DR limits.

Information Management

The Designated Depository will compute and disseminate relevant DR information, collaborating with Domestic Custodians and other Depositories.
DR updates should be published on the websites of both Indian Depositories.

Domestic Custodian Responsibilities

Domestic Custodians must:

Provide initial details of DRs as per formats established by Indian Depositories.
Supply information for computations as required by the Designated Depository.
Ensure underlying securities against DRs are held in a demat account as specified.
Submit necessary certification upon termination of DR programs.

Monitoring Procedure

The following steps outline how monitoring will be conducted:

The Designated Depository will communicate a list of ISINs for which they will oversee DR issuance to the Feed Depository.
Daily updates on ISIN-wise demat holdings will be provided by the Feed Depository.
The Designated Depository will consolidate holdings and calculate outstanding permissible securities.
The formula for calculating headroom, or the limit for converting permissible securities into DRs, is:
- Headroom = A - (B + C)
- Where:
  - A = Number of DRs originally issued (including corporate actions).
  - B = Outstanding permissible securities linked to the DRs.
  - C = Re-issuance approval (unutilized) at end of day.

Re-issuance Mechanism

To facilitate re-issuance of permissible securities:

Foreign investors should request their SEBI-registered Broker for necessary securities.
The Domestic Custodian will approve the request based on the available headroom, valid for three trading days.
The approval must be reported to the Designated Depository, and the status of securities utilization must be tracked.

Monitoring of Investor Group Limits

FPIs must report details of common ownership exceeding fifty percent to their Designated Depository Participant (DDP).
A Nodal FPI may be appointed for centralized reporting.
The Monitoring Depository will consolidate holdings for effective limit oversight and advise investors when limits are breached.

Conclusion

This framework aims to establish a robust monitoring system for foreign holdings in Depository Receipts, ensuring compliance with SEBI regulations and fostering transparency in the market. Stakeholders including Stock Exchanges, Depositories, Domestic Custodians and investors are encouraged to familiarize themselves with the provisions of this circular for effective implementation.