Worried SEBI wants Finance Ministry to plug holes in Global Depository Receipts guidelines

KOLKATA: The Securities & Exchange Board of India (Sebi) is in talks with the finance ministry to tighten rules relating to issuance of Global Depository Receipts as the regulator has found that several local companies are skirting guidelines to raise funds overseas.

According to Sebi Chairman UK Sinha, some firms are misusing the facility to raise funds through issuance of equity overseas in the form of Global Depository Receipts (GDRs) which have underlying shares of Indian companies. Over the past six months, a surveillance system put in place by Sebi to monitor GDR transactions has thrown up evidence that some issuers are attempting to bypass the rules, he said.

What is worrying policymakers is that the liberal norms for raising foreign funds through GDRs are now being misused by a set of companies whose track record and pedigree are viewed as dubious by bankers. The government first allowed companies to list abroad by issuing GDRs and American Depository Receipts (ADRs) in 1993. The first set of issuers included India's blue chip companies led by Reliance Industries and a few Tata Group companies.

Compared to the rules on raising foreign debt, the norms on GDRs were far more liberal with restrictions limited to investment in real estate and the stock market. Sinha told the media on Friday that in a few cases of violation of GDR rules, the funds raised were not repatriated or brought back to the country. "There are also instances where companies have raised GDRs 12-13 times the paid-up equity," he said, while warning violators of stringent action.

The policymakers' decision to revise the rules comes in the wake of regulatory action in September. Last month, Sebi banned seven companies, including Asahi Infrastructure, IKF Technologies, Avon Corp, K Sera Sera and Cals Refineries, from issuing any shares or altering their capital structure in any manner till further notice for alleged manipulation of GDR norms. EThad reported in December 2010 several instances of companies skirting rules on GDRs, with little known firms also securing approvals to raise funds overseas. Sinha said Sebi had also made disclosures by foreign portfolio investors more stringent.

"From October 31, FIIs will file elaborate disclosures which would include the source and name of end beneficiaries. It is operational from end of second quarter (September 30), so the disclosures will start coming from October-end," he said. The Sebi chief said there have been instances of misconduct in the market in the past few months, which have been dealt with strongly.

"There is a provision for client code modifications. During a transaction, there could be a mistake but we found that transactions involving client code modification is close to .`56,000 crore few months ago which we felt cannot be just an error. We came down heavily on that. It is now only .`120 crore. But still I am not satisfied," he said.

Source: EconomicTimes