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  • Writer's pictureSrishti Shankar

Section 41 Of Companies Act 2013: Global Depository Receipt

Updated: Oct 18, 2022

an image of section 41 of companies act 2013
Global Depository Receipt as under Section 41

What is a Depository Receipt?

A depository receipt is an instrument that is denominated in a foreign currency. It is issued by a foreign depository to a domestic administrator and is listed on an international exchange. A Global Depository Receipt ('GDR') is an instrument in the form of a depository receipt generated by a foreign depository outside India and authorized by a firm issuing such depository receipts, according to Section 2(44) of the Companies Act, 2013. Essentially, it provides Indian enterprises with greater access to overseas finances via GDRs by allowing them to raise cash in foreign currencies that are listed and traded on international exchanges.

The 2013 Companies Act introduces the new section of global depository receipts which enables issuance of depository receipts in any foreign country subject to certain conditions. At present the provisions of section 81 of the 1956 Companies Act are in place, they relate to further issue of shares which are being used in conjunction with the requirements mandated by SEBI for the issuance of depository receipts. Through section 41, the companies act 2013 maintains the trend of it supplementing the powers of SEBI by incorporating requirements that have already been mandated by SEBI.

To be clearly understood here we will refer to Section 2(44) which defines the concept of “Global Depository Receipt” as any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorized by a company making an issue of such depository receipts;

Section 41 of the Companies Act 2013

“A company may, after passing a special resolution in its general meeting, issue depository receipts in any foreign country in such manner, and subject to such conditions, as may be prescribed.”

Issuance of Global Depository Receipt

i. Equity shares are issued by Indian companies to a depository bank oversees via a national or domestic custodian bank.

ii. The custodian domestic bank now acting as an agent of the depository bank which is oversees keeps in its custody the equity shares.

iii. Global Deposit repositories are then issued in thee form of foreign currency by the overseas depository bank.

Features of Global Depository Receipt

1. Voting rights are held by the foreign depository associated with the permitted securities.

2. Under the Securities Contracts (Regulations) Rules 1957, the shares of a company that are underlying the depository receipts become part of the company's public shareholding, and the depository receipts are listed on an international exchange.

3. Other than in the instances indicated in sub-paragraph 2, shares of the company underlying depository receipts should not be included in the total shareholding or the public ownership when calculating the business's public shareholding.

4. Holders of depository receipts based on a company's equity shares are subject to the same obligations as holders of the underlying equity shares.

Amendments to the Global Depository Receipt Rules

The Central government through a notification dated 13th February 2020, the new amended rules will now be called Companies (Issue of Global Depository Receipts) Amendment Rules 2020 instead of Companies (Issue of Global Depository Receipts) Rules, 2014. The notification has introduced minor insertions in the old rules namely-

1.The depository receipts can now be issued as a private or a public offering and can also be issued in any legal manner that can be traded in the trading platform of that country’s jurisdiction.

2.Payment or considerations of the proceeds of the depository receipts may be made to an International Financial Services Centre Banking Unit and funds should be utilized as per RBI instructions.

Course of Action under (Issue of Global Depository Receipts) Rules 2014

1.A corporation may issue depository receipts if it is eligible under the Scheme and the relevant requirements of the Foreign Exchange Management Rules and Regulations.

2.A resolution authorizing the firm to issue depository receipts must be passed by the Board of Directors of the company planning to do so.

3.The corporation must additionally obtain shareholder approval for the issue of depository receipts through a special resolution.

4.The corporation must appoint an overseas depository bank to issue the depository receipts, and the underlying shares must be retained in the custody of a domestic custodian bank.

5.The depository receipts can be issued through a public offering, a private placement, or any other method that is common in other countries, and they can be listed or traded on an international listing or trading platform.

6.The depository receipts may be issued in conjunction with the issuance of new shares or sponsored in exchange for shares held by company shareholders, subject to the restrictions that the Central Government or Reserve Bank of India may prescribe or specify from time to time.

7.The underlying shares must be allotted in the name of the overseas depository bank, and depository receipts must be issued in exchange for such shares by the overseas depository bank.

8.After completing the method outlined in the Scheme and the provisions of the Companies Act, 2013, a holder of depository receipts may become a member of the company and be allowed to vote on the conversion of the depository receipts into underlying shares.

9.Until depository receipts are converted, the overseas depository has the right to vote on behalf of depository receipt holders in line with the requirements of the agreement between the depository, depository receipt holders, and the firm in this respect.

10.The proceeds of depository receipt issues must be deposited in an Indian bank operating abroad or any foreign bank that is a Scheduled Bank under the Reserve Bank of India Act, 1934 and has operations in India, with the agreement that the foreign bank having operations in India will take responsibility for furnishing all information that may be required, and in the event of a sponsored issue of depository receipts, the foreign bank will take responsibility for furnishing all information that may be required.

11.The company must appoint a merchant banker, a practicing-chartered accountant, a practicing cost accountant, or a practicing company secretary to oversee all compliances relating to the issue of depository receipts, and the compliance report provided by such merchant banker, practicing chartered accountant, practicing cost accountant, or practicing company secretary must be presented at a meeting of the company's Board of Directors or committee of the company's Board of Directors.

12.The offer document, by whatever name it is known and if it is made for the purpose of issuing depository receipts, should not be considered a prospectus or an offer document, and it will not apply to depository receipts offer document.

13.The name of the foreign depository bank must be entered in the company's Register of Members until the depository receipts are redeemed.

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