Foreign investors who convert depositary receipts (DRs) into equity and sell it on the Indian exchanges are facing roadblocks, with several at the receiving end of penalties and compounding notices from the central bank, two people familiar with the matter said. DRs are instruments used by domestic companies to raise capital outside the country.
Foreign investors, who trade in Indian shares, may buy American Depository Receipts and Global Depository Receipts of Indian companies overseas. Many of them convert it back into shares and sell it on the Indian exchanges.
These are classified as foreign direct investment (FDI) transactions and require investors to file form FC-TRS (Foreign Currency Transfer of Shares) with the Reserve Bank of India (RBI) on a portal called FIRMS (Foreign Investment Reporting and Management System), within 60 days.
But there is a catch.
At a point in time, there could be multiple foreign investors selling the shares of the same company. FIRMs allows only sequential access. This means as soon as one of the foreign investors initiates the process of filing FC-TRS, the portal blocks access to all other investors. Processing the FC-TRS for a particular investor can take several days or weeks, and there is no mechanism at present to intimate or inform other investors that the access to the portal is open again.
What’s more, the RBI has restricted foreign IP addresses and systems from accessing its websites and portals since 2020 in the wake of suspected cyberattacks on central bank systems. Foreign investors, who have to key in inputs on FDI transactions, can only do so through Indian chartered accountants.
Failing to file FC-TRS within the timeline of 60 days can invite late payment fees or compounding notices.
“We have seen quite a few compounding notices from the RBI on the issue in the last 2-3 months. There is no direct redressal mechanism for this and the issue can only be raised through an AD (authorised dealers) banker,” said a person familiar with the matter.
The total number of shares sold by each issuer gets reduced once the FC-TRS is processed. Suppose, an investor A held 200 DRs. If A converts and sells 10 DRs on the exchange, the total number of shares held by A under the FDI route reduces to 190.
“We have been receiving various instances where the details in the entity master are incorrect and when any applicant, other than the entity, files form FC-TRS, the shareholding pattern that auto-populates from the entity master is incorrect, giving negative values,” a note put out by RBI on FIRMS says. “This issue is frequently observed in respect of listed companies and where the DRs have been converted into underlying equity shares and being sold out on stock exchange by the non-resident investor.”
It further says that the onus of reporting in FC-TRS is on the non-resident investor. However, it is the responsibility of the investee entity to ensure correctness of data filed in the entity master.
The entity master details reflects the total foreign investment in the entity. The paid up capital on fully diluted basis is for the total paid up capital (resident and non-resident) in the entity and is used for calculating the percentage of foreign investment in the entity.
“The solution lies in asking one of the market infrastructure institutions — exchanges, clearing corporations or depositories — to feed the information into RBI systems and let foreign investors off the obligation. This will ensure that fewer entities are responsible for compliance and ensure faster reporting to the central bank than current 60 days, as allowed,” said a second person familiar with the matter.
Besides ADRs and GDRs, the problem can crop up during conversion of Foreign Currency Convertible Bonds (FCCBs) into shares as well, this person said.
FCCBs are bonds issued by Indian companies, the principal and interest for which is payable in foreign currency. These are subscribed to by a non-resident and convertible into ordinary shares of the issuing company in any manner, in whole or part, on the basis of any equity related warrants attached to the debt instruments.