Investors issued sanctions, notices: Trade in certificates of deposit sees a bump

Foreign investors converting certificates of deposit (DRs) into shares and reselling them on Indian stock exchanges face obstacles, with several facing sanctions and compound notices from the central bank, two people said close to the file. DRs are instruments used by domestic companies to raise capital outside the country.

Foreign investors, who trade in Indian stocks, can purchase American Depository Receipts and Global Depository Receipts from Indian companies overseas. Many of them convert it back into shares and resell it on Indian stock 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 any given time, several foreign investors could sell the shares of the same company. FIRMs only allow sequential access. This means that as soon as one of the foreign investors starts the FC-TRS filing process, the portal blocks access to all other investors. The processing of the FC-TRS for a particular investor may take several days or weeks, and there is currently no mechanism to notify or inform other investors that access to the portal is open again.

Additionally, the RBI has restricted access by foreign IP addresses and systems to its websites and portals since 2020 following alleged cyberattacks on central bank systems. Foreign investors, who must enter data on FDI transactions, can only do so through Indian chartered accountants.

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Failure to file FC-TRS within the 60 day period may result in late payment fees or compound notices.

“We have seen quite a few compound opinions from the RBI on the matter over the last 2-3 months. There is no direct redress mechanism for this and the issue can only be raised through an AD (approved resellers) banker,” said a person familiar with the matter.

The total number of shares sold by each issuer is reduced once the FC-TRS is processed. Suppose an investor A holds 200 DR. If A converts and sells 10 DRs on the stock exchange, the total number of shares held by A under the FDI route reduces to 190.

“We have received various instances where the Entity Master details are incorrect and when an applicant other than the Entity files the FC-TRS form, the stock ownership template that automatically populates from the entity is incorrect, giving negative values,” a note posted by RBI on FIRMS said. “This problem is frequently observed with respect to listed companies and when the DRs have been converted into the underlying shares and sold on the exchange by the non-resident investor.”

It further indicates that the reporting burden in FC-TRS is on the non-resident investor. However, it is the responsibility of the beneficiary entity to ensure the accuracy of the data deposited in the reference file of the entity.

The basic entity details reflect the total foreign investment in the entity. Fully diluted paid-up capital is the total paid-up capital (resident and non-resident) of the entity and is used to calculate the percentage of foreign investment in the entity.

“The solution is to have one of the market infrastructure institutions – exchanges, clearing houses or custodians – enter the information into the RBI systems and release foreign investors from the obligation. This will ensure that less entities are responsible for compliance and will ensure faster reporting to the central bank than the current 60 days as permitted,” said a second person familiar with the matter.

Besides ADRs and GDRs, the problem can also arise when converting foreign currency convertible bonds (FCCBs) into stocks, the person said.

FCCBs are bonds issued by Indian companies, with principal and interest payable in foreign currencies. These are subscribed by a non-resident and convertible into ordinary shares of the issuing company in any way, in whole or in part, on the basis of the equity warrants attached to the debt securities.

Robert D. Coleman