Depository receipts and the takeover code

Further to the announcement made at its board meeting of 22 September, the Securities and Exchange Board of India (SEBI) through a notification on 6 November amended various aspects of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, commonly known as the takeover code or the code. One of the major amendments was to bring American depository receipts/ global depository receipts with voting rights on par with equity shareholdings for the purposes of the code.

Traditionally, the decision as to how voting rights in relation to depository receipts (DRs) would be exercised was made jointly by the issuer and the overseas depository. The issuer is the company which issues the equity shares to be converted into DRs; the overseas depository (OD) is the bank or financial institution which holds the shares for the issuer for the benefit of the DR holders, and which issues the DRs.

The voting arrangement was disclosed in the offer document provided to prospective DR holders, thereby binding them with the arrangement. These arrangements could be one of three broad types: (i) the OD would exercise the voting rights in accordance with the DR holders’ instructions; (ii) the OD would vote with the existing management of the issuer; or (iii) the OD would abstain from exercising the voting rights attached to the DRs.

Sawant Singh is a partner and Arun Madhu an associate at Phoenix Legal in Mumbai. They can be reached at sawant.singh@phoenixlegal.in and arun.madhu@phoenixlegal.in.