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RBI approves ADR/GDR re-issue

Our Bureau

MUMBAI, Feb. 13

THE limited two-way fungibility of ADRs/GDRs has become operational, and the Reserve Bank of India (RBI) on Wednesday issued necessary guidelines following approval by the Government.

The approval, which provides investors with greater flexibility, is also seen as another step towards achieving capital account convertibility.

Under the guidelines, re-issue of ADRs/GDRs would be permitted to the extent of ADRs/GDRs that have been redeemed and the underlying shares sold in the domestic market.

Two-way fungibility implies that an investor who holds ADRs/GDRs can cancel them with the depository and sell the underlying shares in the market. The company can then issue fresh ADRs to the extent of shares cancelled.

No specific permission of the RBI will be required for the re-conversion. Besides, investments under foreign currency convertible bonds and ordinary shares will be treated as direct foreign investment.

Accordingly, the re-conversion of shares into ADRs/GDRs will be distinct from portfolio investments by foreign institutional investors (FIIs), the RBI said.

The RBI guidelines state that the transactions will be demand-driven and would not require company involvement or fresh permissions.

The custodian would monitor the re-issuance of ADRs/GDRs within the sectoral cap fixed by the Government.

The RBI has also said that each purchase transaction will be only against delivery and payment received in foreign exchange through banking channels.

For this purpose, all SEBI registered brokers will be able to act as intermediaries in the two-way fungibility of ADRs/GDRs.

The RBI has already given general permission to brokers to buy shares on behalf of overseas investors on March 2 last year.

As secondary market operations, the acquisition of shares on behalf of the overseas investors through the intermediary would fall within the regulatory purview of Securities and Exchange Board of India (SEBI).

The Central bank has said that since the demand for re-conversion of shares into ADRs/GDRs would be from overseas investors and not the company, the expenses would be borne by the investor. The transactions will be governed by the Income-Tax Act.

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