Sahoo panel suggests Bharat Depository Receipts to revive market for depository receipts

A panel appointed by the government has suggested reforms in the framework of domestic depository receipts, within the overall capital control regime, and the creation of Bharat Depository Receipts to allow domestic investors access the market the way foreign companies use depository receipts to access the domestic market.

The committee headed by MS Sahoo, secretary, Institute of Company Secretaries of India, suggested modification of the laws and regulations relating to markets and Indian institutional investors so as to ensure a level playing ?eld between an Indian security and a domestic DR in the eyes of all Indian institutional investors.

''They must also be allowed, enabled and encouraged to reduce their portfolio risk through international diversi?cation, including investments in IDRs,'' the committee suggested.

The committee, set up to review the entire framework of access to domestic and overseas capital markets and related aspects, wanted the government to provide a level playing field between securities issued by Indian and overseas firms. Capital control regulations should be motivated only by the need to address market failures, the committee said.

IDRs are securities sold in India by a domestic depository on underlying foreign securities.

To protect consumers from a market failure, the committee suggested the creation of two levels of Bharat Depository Receipts (BhDRs) –  one level that gives access to all Indian investors and require compliance with regulations and the other level that would have a lower regulatory burden, but give access to sophisticated investors by having Rs10 lakh market lot.

''That is, the smallest unit in which the securities could be issued and traded should be Rs1 million, which would keep out unsophisticated investors,'' the report said.

''The lukewarm response to the IDR policy indicates that the governing framework is not in sync with contemporary practices and thinking and, therefore, needs a review to realise the benefits of an active IDR market for Indian investors and the Indian financial system,'' the report said.

An earlier report submitted by the same committee on reforming the American depository receipts (ADRs) and global depository receipts (GDRs) had suggested a liberal regime by allowing their sale against any underlying security - equity or debt - by any issuer, whether listed or unlisted. Only listed companies have until now been allowed to sell DRs and only against underlying equity shares.

The committee envisages a more competitive landscape for the Indian capital market. ''Indian issuers will evaluate whether the ADR/GDR market better serves their interests and global firms will evaluate whether domestic DR issues make sense,'' the panel said. ''This will bring competitive pressure upon the Indian primary and secondary market. This competition will encourage reforms of regulations, drive modernisation by infrastructure institutions and financial firms, and result in improved efficiency of the Indian economy.''

A vibrant depository receipts market will have one additional positive impact upon the Indian economy through reduction of risk, the report says.

At present, household portfolios and the positions of financial firms suffer from poor diversification by an overemphasis on Indian assets. ''This home bias is likely to decline when global assets are made more visible and more accessible through the domestic DR market. Through this mechanism, the creation of a vibrant domestic DR market would cater to the goal of risk reduction in finance and improve the welfare of households,'' it said.

The finance ministry in consultation with the Reserve Bank of India and capital market regulator Securities and Exchange Board of India (SEBI) will examine the report, the ministry stated in a release.

Under the present framework, there has been only one issue of IDR till date by Standard Chartered Plc in 2010.