MUMBAI: The liberalised regime for Global Depository Receipts (GDR) and American Depository Receipts (ADR) might not take off as long as the income tax (I-T) department is not willing to recognise any of these, except equity and sponsored ones.
“We do not know who is behind the unsponsored DRs. This could lead to issues in monitoring them. Further, we fear these instruments could be used for money laundering and tax evasion. With our increased focus on bringing transparency and prevent tax evasion, giving tax exemption to unsponsored DRs defeats our purpose,” said a senior finance ministry official.
The liberalised DR regime was recommended by the M S Sahoo committee, which had outlined launch of unsponsored ADR and GDR and launch of DRs with underlying securities other than equity.
Under the new regime, companies will be allowed to issue DRs (foreign currency-denominated trading instruments) on all securities – debt, equity and mutual fund units, both sponsored and unsponsored. Under the current regime, domestic issuers are not permitted to issue unsponsored DRs and those with an underlying product other than equity. They will also be allowed to issue DRs for non-capital raising purposes such as improving liquidity, valuation or creating brand visibility in international markets.
Unsponsored DRs are issued by a depository bank without the involvement or participation or even the consent of the issuer whose stock underlies the receipts The issuer, therefore, has no control over an unsponsored DR, in contrast to a sponsored one.
The finance ministry had accepted all the recommendations and the regime was supposed to kick in from last December. The expectation from this year’s Budget was an amendment to the I-T Act to give a tax incentive to it. However, this did not happen.
After notification of the regime, many foreign banks stated their intent of launching DRs and some were in advanced stages of getting these into the market.
BNY Mellon confirmed it had filed with the US Securities and Exchange Commission to establish several unsponsored DR programmes from India, with total trading for over 50 Indian companies. Other foreign banks that were in advanced stages of launching were waiting for tax clarity. Experts say with the lack of similar tax treatment for sponsored and unsponsored DRs, the banks might not be interested in launching the programmes.
