BNY Mellon lobbies India to overhaul DR regulation

Foreign investors limited in options due to DR scarcity in India, depositary bank says

India should overhaul its regulation on DRs for Indian companies and introduce over-the-counter, non-capital-raising DR programs to remain a top destination for international investment, says BNY Mellon, the world’s largest global custodian and depositary bank.

Since India established its first DR program in 1992, only 13 Indian companies have set up ADR programs, BNY Mellon says in a report entitled India: Easing conditions for investors. The study concludes that investment would increase if Indian companies are allowed to trade over the counter in the US via non-capital-raising ADR programs.

Neil Atkinson, head of BNY Mellon’s Indian depositary receipts business, says that the time is right to reexamine the regulations. ‘We are buoyed by the finance minister’s recent budget comments, which can be summarized as follows: India does not have choice between welcoming and spurning foreign investment; it is an imperative. We have to encourage foreign investments which are in accordance to meet the economic objectives.’

Atkinson explains that ‘there is clear and consistent demand from investors who would like conditions eased and are keen to invest in Indian companies in ADR form,’ adding that ADRs represent a ‘a multi-billion dollar opportunity for India and India's corporates as they benefit from expanding their shareholder bases.’

Unfortunately, current regulations restrict companies’ ability to establish ADR programs, adds Gregory Roath, BNY Mellon’s Asia-Pacific head of DRs, in a press statement. ‘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.’

The study by BNY Mellon suggests that the Indian authorities allow non-capital-raising OTC ADR programs with a series of conditions. Companies should be listed on a recognized Indian stock exchange, only deposit outstanding shares in the DR program, not be allowed to restrict voting rights of DR holders, and be allowed to issue 5 percent to 10 percent of their share capital. The study also recommends that companies be limited to issuing the number of shares current Indian legislation allows to be held by foreign investors, based on the companies’ sector of activity.

The report follows a series of meetings between BNY Mellon and officials from India’s Ministry of Finance, the Securities and Exchange Board of India, and the Reserve Bank of India on the proposal. BNY Mellon says the government gave a boost to overseas investment last year with the establishment of its Qualified Foreign Investor initiative, but many international investors see the program as too complex or bureaucratic, particularly in its requirements that a permanent account number be set up, trades be pre-funded and relationships be established with local brokers.

While the MSCI Emerging Markets Index includes 72 Indian companies, BNY Mellon says only eight of them trade in unrestricted DR form. The depositary bank adds that 67 other emerging market countries, including Brazil, Turkey and South Africa, allow non-capital-raising OTC DR programs.

‘We are very interested in any new ADRs available for companies based in India,’ Cynthia Tusan, president of investment management firm Strategic Global Advisers, says in the report. ‘We invest in India but, generally, we can access that market only through ADRs as most of the accounts we manage, even the institutional accounts of more than $25 mn, do not have custody capability in India. We find the number of ADRs available for India to be extremely limited.’

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