What Are the Practical Difficulties in Identifying SBOs for GDRs
The Ministry of Corporate Affairs (MCA) on 8 February 2019 issued the Companies (Significant Beneficial Owners) (Amendment) Rules, 2019 amending the Companies (Significant Beneficial Owners) Rules, 2018 (the SBO Rules), thereby drastically amending the definition of SBO. 
 
However, there are certain practical difficulties in identifying the SBOs, especially in case of global depository receipts (GDRs).
 
As per the SBO Rules notified by MCA, GDR holders will get covered within the ambit of the SBO, if any individual through GDR is able to:
 
  • get more than 10% of distributable dividend; or 
  • exercise 10% of voting rights based on the instruction given to the depository or on conversion of GDRs into shares;
  • hold 10% of the equity shares in the company on conversion.
 
There is a legal right for the GDR holders in Euroclear and Clearstream to remain anonymous if they wish to do so. In many cases the GDR holders choose to withhold their identity. GDR holders with shares held in Euroclear and Clearstream have their anonymity protected by the laws of Brussels and Luxembourg respectively.
 
 
Therefore, reporting company cannot identify the GDR holders, especially the ones issued under the erstwhile scheme i.e. FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.  It was also suggested in the Sahoo Committee Report that issuances should be made in FATF complaint jurisdictions as FATF recommendations prohibit financial institutions from keeping anonymous accounts. (https://www.finmin.nic.in/sites/default/files/Sahoo_Committee_Report.pdf)
 
Accordingly, reporting companies will be required to seek information in Form BEN 4 through the depository bank in order to comply with SBO Rules if the quantum of GDR is 10% or more of the shares of the reporting company.
 
As per the recent simplified definition, an SBO is described as follows:
 
“Significant Beneficial Owner in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who, acting alone or, together, or through one or more persons or trust, who possesses one or more of the following rights or entitlements in such company, namely:-
 
  • Holds indirectly, or together with any direct holdings, not less than ten per cent of the shares;
  • Holds indirectly, or together with any direct holdings, not less than ten per cent of the voting rights in the shares;
  • Has the right to receive or participate in not less than ten per cent of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
  • Has the right to exercise or actually exercises, directly or indirectly, significant influence or control, in any manner other than through direct holdings alone.”
  • Meaning of Shares as per the SBO Rules
 
As per the simplified SBO Rules, apart from the equity shares, instruments in the form of global depository receipts -GDRs, compulsorily convertible preference shares or compulsorily convertible debentures shall also be treated as ‘shares’.
 
Meaning of Depository Receipt
 
 
“Depository Receipt means a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of eligible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in section 2(44) of the Companies Act, 2013.”
 
Meaning of Global Depository Receipts
 
As per Section 2(44) of the Companies Act, 2013, a global depository receipt (GDR) means any instrument in the form of a depository receipt, by whatever name called or created by a foreign depository outside India and authorised by a company making an issue of such depository receipts.
 
Process of issuing GDRs by Indian companies:
 
The process of issuing GDRs by Indian company involves:
 
1. Issuance of its equity shares (in Indian currency) to an overseas depository bank, through a domestic custodian bank.
2. The domestic custodian bank acts as the agent of overseas depository bank, and keeps the equity shares in its custody.
3. The overseas depository bank issues GDRs against the said equity shares to the overseas investors (in foreign currency). 
 
 
Voting rights of GDR Holders
 
Companies Act, 2013
 
As per the Rule 6 of the Companies (Issue of Global Depository Receipts) Rules, 2014:
 
(1) A holder of depository receipts may become a member of the company and shall be entitled to vote as such only on conversion of the depository receipts into underlying shares after following the procedure provided in the scheme and the provisions of the Companies Act, 2013. 
 
(2) Until the conversion of depository receipts, the overseas depository shall be entitled to vote on behalf of the holders of depository receipts in accordance with the provisions of the agreement entered into between the depository, holders of depository receipts and the company in this regard.
 
Depository Receipts Scheme, 2014
 
As per para 7 of the depository scheme, 2014, issued by the department of economic affairs, the following are the rights and duties of the GDR holders and the foreign depositories:
 
1. The foreign depository shall be entitled to exercise voting rights, if any, associated with the permissible securities, whether pursuant to voting instructions from the holder of depository receipts or otherwise;
 
2. The shares of a company underlying the depository receipts shall form part of the public shareholding of the company under the Securities Contracts (Regulations) Rules 1957, if:
 
  • the holder of such depository receipts has the right to issue voting instructions; and
  • such depository receipts are listed on an international exchange.
 
3. In the cases not covered under sub-paragraph 2, shares of the company underlying depository receipts shall not be included in the total shareholding and in the public shareholding for the purpose of computing the public shareholding of the company.
 
4. A holder of depository receipts issued on the back of equity shares of a company shall have the same obligations as if it is the holder of the underlying equity shares if it has the right to issue voting instruction.
 
RBI Master Directions for Private Sector Banks 
 
Para 10 of RBI master direction – ownership in private sector banks, directions, 2016 provides that banks shall enter into an agreement with the depository to the effect that the depository shall not exercise voting rights in respect of the shares held by them or they shall exercise voting rights as directed by the board of directors of the bank.
 
In a nutshell
 
In case of private sector banks, the voting rights shall be exercised by the depositories depending upon the instructions received by the board of directors of the bank.
 
In case of non-banks, on the collective reading of the aforesaid requirements, it is evident that when the GDR holders exercise their right to exchange with equity shares, then only the GDR holder becomes the shareholder of the issuer company. Till then, the name of the depository bank reflects in the register of members of the issuer company. 
 
Therefore, until conversion, the voting right is not exercised by the GDR holder but by the overseas depository, pursuant to the agreement between the depository and the issuer.
 
In case of GDR issued under the Companies Act, 2013, the voting right shall be as per the agreement between the GDR holder, depository and the issuer company.
 
Right to receive dividend by the GDR holders
 
Until conversion of the GDR into equity shares, the dividend is paid by the company to the depository bank which further distributes it to the GDR holders.
 
(The authors are consultants with Vinod Kothari & Company
 
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    Vedanta Says No Discussion with JSW Steel for Joint Bid for Essar Steel
    Vedanta Ltd has termed as 'speculative and baseless' news reports about alleged discussion between the company and JSW Steel Ltd for a possible last minute bid for Essar Steel.
     
    In a regulatory filing, Vedanta says, "The Company confirms categorically that it is not in the process of submitting any revised bid for Essar Steel under the IBC process as mentioned in the articles."
     
    According to reports, Sajjan Jindal’s JSW Steel was believed to be in talks with Anil Agarwal’s Vedanta to mount a late bid for Essar Steel. 
     
    The committee of creditors of bankrupt Essar Steel had chosen ArcelorMittal as the highest bidder and submitted the Rs42,000-crore plan of the world’s largest steel maker before the National Company Law Tribunal, Ahmedabad, for approval.
     
    Vedanta, which made a low-ball offer of Rs 35,000 crore for the 8-million-tonne plant at Hazira, may now raise the bid to Rs 45,000-48,000 crore, with the backing of the Jindals, a report from The Telegraph says.
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    GST Rate Cut – Panacea or Brief Pain Relief for Real Estate?
    The recent interim budget announced fresh sops for the Indian real estate sector—which, on closer scrutiny, did not really send clear revival signals to the market at all. Now, the strident demand for lowering goods and services tax (GST) rates on under-construction properties is on the table.
     
    In fact, the prime minister and finance minister have proactively assured that they are considering this collective demand from the industry positively. Will a GST cut infuse enough positive sentiment to help the languishing real estate sector revive?
     
    Perhaps, rather than debating whether a GST cut will do the trick, we should ask ourselves whether it would actually solve the ‘real’ problems the sector is facing.
     
    The general expectation is that a few sops here and there will bring in the much-needed respite, when they actually only give a momentary infusion of notional positive sentiment. They can be likened to doses of painkiller to a suffering patient—while they quell the symptom of pain for a while, they do nothing to cure the underlying cause of the pain.
     
    For the real estate sector, the fundamental causes of its pain are:
     
    • A massive number of under-construction housing projects are heavily delayed or chronically stuck;
    • The basic cost of homes is still far too high for the largest segment of the population;
    • The prevailing credit squeeze on developers remains unaddressed;
    • The Real Estate (Regulation and Development) Act, 2016 (RERA) is not a national force but more of a regional one.
     
    A GST rate cut does nothing to solve these problems. It could be argued that the marginally increased sales would ease developers' funding issues. However, a small boost in sales will not put a serious dent in their existing debt or solve their funding issues. It would be symptomatic relief, at best.
     
    The Cost of a Home - before and after a New GST Rate
     
    Let us examine the actual benefits that a buyer gets after and before a GST rate cut. For an under-construction apartment sized 1,000 sq ft and price-tagged at Rs5,000/sq ft, a buyer currently pays about Rs4.2 lakh as GST, assuming that the builder has passed on the input tax credit (ITC) benefit of nearly Rs1.8 lakh to the buyer.
     
    If the GST rate is slashed to a flat 5% without the ITC benefit, this buyer will have to cough up Rs2.5 lakh as GST. So, he essentially saves Rs1.7 lakh if the GST rate cut happens. However, will a saving of Rs1.7 lakh on a home that costs Rs50 lakh really trigger a surge of home sales big enough to bail it out?
     
    No doubt, even a slightest sentiment boost goes a long way in increasing sales by a certain percentage. Nevertheless, we are currently looking at a humungous unsold stock of 673,000 units across the top seven cities, and new units are being added every month. The sector would need some phenomenal triggers to shed this burden.
     
    The Bane of a Differential Tax System
     
    Even though 2018 witnessed green shoots of revival as far as sales and new launches were concerned, housing sales numbers were largely dominated by ready-to-move-in units, which are exempt from GST. While the 12% GST levy on under-construction properties certainly proved to be a deterrent to buyers, the uncertainty of project completion was a far more serious dampener.
      
    Also, more than the high GST rate, it is the differential tax treatment for under-construction and ready-to-move-in properties which has exacerbated the slowdown in the real estate sector. Buyers deferred their purchases until a project obtained the completion certificate so that they would save on GST altogether. This put an additional burden on builders who need to finance their projects to completion, since advance sales were very sluggish.
     
    ANAROCK data indicates that out of the total unsold stock 673,000 units in the top seven cities, only 13% are ready-to-move-in (RTM). Out of the remaining 588,000 unsold under-construction units, 20% are slated to be completed by 2019. If they do get completed as per this schedule, another 116,000 units will be added to the RTM category.
     
    Naturally, buyers will continue to prefer RTM units, which are altogether free of GST rather than under-construction homes which do attract this tax. The contest between a lower GST and no GST at all is a no-brainer - apart from the fact that buyers of RTM homes have the benefit of instant gratification, freedom from project completion uncertainty, and savings on rental outgo until the project is completed.
     
    Given that the previously significant price gap between RTM and under-construction homes has reduced remarkably, a reduction in GST will not be a panacea to heal the major woes of the housing sector. The differential tax treatment between the two is by itself a sentiment dampener.
     
    Need of the Hour: A Bigger Game Plan
     
    Rather than a GST rate cut, it is the recent hint at a possibility of uniform taxation of under-construction and RTM homes, which would really help. A GST rate cut would compel a few more fence-sitting buyers to take the plunge, but it will not serve the purpose of making under-construction properties as attractive as RTM properties.
     
    Limited advance sales will continue to curtail cash flows for developers who will have to resort to other financing options. Apart from the fact that private equity (PE) is an option only to players with exceptionally strong balance sheets and completion records, PE also comes at higher interest rates.
     
    Non-banking finance companies (NBFCs) are in a crisis and banks have curtailed credit to builders, despite instructions from the Reserve Bank of India (RBI) to ease lending norms. This increases the overall costs they incur on their projects, and this cost is being passed on to buyers in one way or the other.
     
    The real estate sector may experience a minor, temporary lift on the back of a GST rate cut, and a bigger, longer-lasting lift of the differential tax is done away with altogether and one uniform tax is applied.
     
    However, the larger issues of the sector that need to be addressed are:
     
    • Reducing the dependency of builders on external funding sources. Supply trends for 2018 indicate that builders are cautiously trying to bridge the demand-supply gap by launching projects in segments that have maximum demand. This proactiveness should be reciprocated by easing of lending norms.
    • Failed or delayed projects have severely diminished buyers' faith in under-construction properties. This issue must be addressed via measures to ensure that such projects are either completed or their buyers are refunded in full, so that their home buying options open up once again.
    • RERA implementation across all major states cannot remain on paper or on bureaucratic discussion tables.
     
      
    (Anuj Puri is Chairman of ANAROCK Property Consultants Pvt Ltd)
     
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    COMMENTS

    Gurudutt Mundkur

    7 months ago

    Most nuclear families have broken up and children have got their own residences. Naturally, the demand for new accommodation has dropped drastically. Why builders are still indulging in constructing new accommodation is a moot point.
    Only a small number would be looking for a second home, or a holiday home, given what the tax-laws are.

    Mahesh S Bhatt

    7 months ago

    Can we have industry wise rate cards of official & so called unofficial taxes or service charges? Mahesh Bhatt

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