Easier KYC for foreign firms investing in Indian companies

The government has eased the client-verification requirement under the Prevention of Money Laundering Act for overseas investors who want to put money in the depository receipts of Indian companies.

Now, foreign investors do not need to complete any separate KYC (know your client) process as per Indian rules, and can buy depository receipts of Indian companies based on the proof of identity they have established with authorities in their country of origin, said a government notification issued last week.

The decision is expected to make it easier for local companies to raise money overseas, said market experts.

Depository receipts, such as American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), are instruments denominated in foreign currencies. Indian companies, including ICICI Bank, Infosys, Tata Motors, Wipro and MakeMyTrip, have their depository receipts listed on US stock markets. These are issued by a foreign depository against the shares the companies have deposited with a custodian in India.

“No one has done a depository receipt issue in past five years,” said a senior official with a foreign custodian bank.

Sebi yet to issue rules for unsponsored DRs

The government has now paved the way for fresh issue of depository receipts, said the official with the foreign custodian bank. Finance minister Nirmala Sitharaman last month said the depository receipts scheme of 2014 would be operationalised soon by the Securities and Exchange Board of India, to enable local companies access foreign funds through ADRs and GDRs.

The finance ministry had liberalised the scheme in 2014, when it allowed any Indian company — whether listed or unlisted — to issue depository receipts. It had also allowed the issue of unsponsored depository receipts, which are issued without the specific approval of the issuer of underlying securities. Sebi had reservations about allowing unsponsored depository receipts as they are transferable and the identity of the overseas holders will not be known. It has yet to issue the guidelines to implement this scheme.

Sandip Bhagat, a partner at law firm S&R Associates, said the amended rule would work well for listing of depository receipts in western markets, but may not make the cut for private placements. “KYC requirements based on home country requirements is a great idea where the securities are publicly traded, as the regulatory oversight is high for markets involving retail or public investors,” Bhagat said.