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GDR holders merit voting rights
August, 23rd 2007
There is no reason why parity of treatment cannot be given to the non-resident investor subscribing to Indian equity through GDR or ADR

An impression, fostered by the offer documents of Indian companies, has gained ground that holders of GDRs and ADRs have got no voting rights because the Indian law does not confer voting rights on them.

In fact, some of the companies go to the extent of specifying lack of voting rights under risk factors for the non-resident investors for whom these esoteric instruments are meant.

There seems to be nothing in our company law that places such a restriction.

In fact, the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipts Mechanism) Scheme notified by the Department of Economic Affairs in November 1993 concedes that investments made by non-residents in GDRs would be treated as Foreign Direct Investment (FDI). If they are indeed FDI, a fortiori they must be accompanied by voting rights.

It cannot be anyones case that a retail investor who normally subscribes to a GDR can be given lesser rights than wholesale investors such as foreign collaborators though it must be conceded that the former set of investors would not take the trouble of exercising their voting rights even if granted. But whether to exercise the right to vote or not is their sweet discretion.

An analogy with the depository regime obtaining for the Indian resident investors is in order. Most of the Indian listed companies have dispensed with physical share certificates and embraced wholeheartedly the concept of depositories in which shares are held in a digitalised form.

The depository is the registered owner all right but all the economic rights including voting are vested on the beneficial owners of the shares. This is as it should be. There is no reason why a parity of treatment cannot be given to the non-resident investors subscribing to Indian equity through GDR or ADR.

Downright self-serving

The offer documents are wishy-washy, misleading and downright self-serving on the issue of voting rights when they say that Indian laws do not permit GDR holders to vote and should the law change, the voting right can be exercised only as directed by the board of directors of the issuing company.

This is shocking to say the least. The Depositories Act obtaining for resident investors does not deprive them of voting rights.

How then can the non-residents be deprived of their voting rights should they want to exercise them? Merely because the shares are issued to the domestic custodian bank who in turn requests the overseas depository bank to issue GDRs to subscribers thereof whose underlying security are the shares issued to the domestic custodian bank does not mean that what they have invested in is something other than shares.

A foreign investor is twice removed, as it were, from the Indian issuing company whereas the Indian investor is separated from the Indian company just by the depository.

This seems to be the only difference in the depository dispensation obtaining for them which certainly cannot come in the way of them exercising their voting rights.

To be sure, GDRs can be swapped for the underlying shares anytime whereupon voting rights can of course be exercised.

Is it the intention of Parliament that GDR and ADR holders should first morph into shareholders before they can exercise their voting rights?

It is high time that powers that be addressed this issue squarely. That no GDR holder perhaps has staked his claim to vote so far does not mean that we should avoid this issue and let it fester.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)
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