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Sebi to write to Fin Min, RBI for changes to ADR/GDR law
May, 24th 2010

Securities Exchange Board of India (Sebi) has clamped down voting rights of American Depositary Receipt (ADR) as well as Global Depositary Receipt (GDR) holders being transferred to Indian managements, says CNBC-TV18.

Its proposal was discussed in the board meeting held on 19 May.

The market regulator has said that voting rights of ADR/GDR holders should not be transferred to Indian managements. Some Indian management "unilaterally" put clauses in "terms of issue", it said.

It added that it will write to the Finance Ministry and RBI for changes in the law.

In what could be a very major change in the manner in which Indian companies have been issuing ADRs and GDRs, the market regulator said that it does not quite like the practice that has been followed for many years where the Indian boards or the Indian managements actually end up getting the voting rights from the depository banks.

To put it into perspective - as per the law the depository bank is registered and the shareholder has the voting right.

Of course the eventual holder of the depository receipt does not have voting rights. But what was really happening was that all these years while the issuance was happening, there was an agreement between the issuer and the depository bank. This gave complete 100% control on the Indian board or the management in many cases to exercise the votes. In other words the depository bank was actually being deprived of its rights to vote in all such ADR/GDR issuances.

Now this issue was raised last September when the Bharti-MTN deal happened. After that the regulator did step in and change the law to say that wherever a voting right has been given in any manner or is exercised would attract the provisions of a takeover code.

Now the regulator is going a step forward and saying, Good governance demands that such unilateral agreements should not be entered into. You cannot take away the right of a depository bank to exercise its vote the way it wants to do.

We learned from our sources that Sebi Board which has nominees of the Finance Ministry as well as the RBI was of the view that the regulator should put up a formal note to the government as well as to RBI because RBI deals with bank issuances and get an amendment to the law which will prevent any such agreements in the future where you could have a situation, where the Indian Board is exercising. According to Sebi, if this were to be a case in future then it would also attract the provisions of the takeover cod because its in effect meaning that you are getting control of voting rights.

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