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GDRs & Tax: The Debate Continues!

Published on Mon, May 18,2015 | 22:28, Updated at Mon, May 18 at 22:32Source : 

By: Amrish Shah, Partner & National Leader - Transaction Tax, EY

In India’s liberalisation arena, one of the first areas of reform was issuance of Global Depository Receipts (“GDRs”) by the Indian Companies. GDRs facilitated Indian companies to list abroad and raise capital from foreign investors. In the early 1990s, it became possible for Indian Companies to tap foreign investors by issuance of GDRs. In the early years, GDRs made up the bulk of foreign investment into Indian equities.

GDR is a foreign currency denominated financial instrument issued outside India by a foreign depository to investors, against an underlying Indian security which is deposited with a domestic custodian in India.

Earlier, GDRs were governed by ‘Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through depository receipts mechanism) Scheme 1993’ (“1993 Scheme”). However, as the erstwhile 1993 Scheme was not in consonance with the evolving financial market needs, the finance ministry appointed the Sahoo Committee on September 23, 2013 to undertake a comprehensive review of the GDR policy. Based on the recommendations of the Sahoo Committee and various other stakeholders,  the Central Government repealed the 1993 Scheme (excluding provisions governing foreign currency convertible bonds) and replaced it with the Depository Receipts Scheme, 2014 (“2014 Scheme”) with effect from December 15, 2014.

Key changes introduced under the 2014 Scheme vis-a-vis the 1993 Scheme, inter-alia, include the following:

1993 Scheme

2014 Scheme

GDRs could be issued only by Indian listed companies.

GDRs can be issued by both listed and unlisted Indian companies whether public or private.

GDRs could be issued only against underlying shares.

GDRs can be issued against underlying permissible securities such as shares, debt instruments etc.

The Scheme specifically laid down the manner of taxation on conversion of GDRs into shares.

The Scheme is silent on the manner of taxation on conversion of GDRs into shares/ securities.


It may be pertinent to note that the Income Tax Act (“IT Act”) does cover taxation of capital gains arising to non-resident investors on transfer of GDRs with a specific exemption also being provided for transfer of GDRs from one non-resident to another non-resident outside India. However, the IT Act was silent with respect to cost of acquisition (“cost”) and period of holding (“period”) to be considered of underlying shares which will be received on conversion of GDRs into shares. These tax attributes could be relevant for non-resident investors to understand as it may facilitate them to determine the capital gains tax payable on transfer of underlying shares.

Interestingly, the erstwhile 1993 Scheme provided the mechanism for determining the cost and period to be considered on conversion of GDRs into listed company shares. However, the 2014 Scheme (which repealed the 1993 Scheme) is silent on the same. This resulted in an ambiguity about the mechanism to be considered for determining the cost and period of underlying shares on conversion of GDRs.  

To put to rest the aforesaid anomaly, the Finance Act 2015 (“FA 2015”) now provides that on conversion of GDRs into the underlying listed company shares, the cost of the shares should be the price prevailing on a recognised stock exchange on the date of advice for conversion and the period of holding shall be reckoned from such date. The amendments brought in by FA 2015 are similar to the tax treatment provided for computing the cost and period as prescribed under the 1993 Scheme.

As a welcome move this anomaly has been addressed to some extent by the FA 2015. However, the cost and period in a scenario where GDRs are issued against unlisted shares or other permissible securities such as debentures etc. have not been specified as the FA 2015 only prescribes the mechanism for determining the cost and period in case of “listed shares”. Further, clarity is also required to determine the cost and period of GDRs which are converted into underlying listed company shares during the period between December 15, 2014 and March 31, 2015 as the amendments brought in by FA 2015 are not retrospective in nature.      

Separately, given how the definition of GDRs is presently worded in the IT Act, it may be relevant to examine whether the taxation treatment provided under the IT Act covers only GDRs issued against “fresh issue” of underlying listed shares or even those that are issued against “existing shares”. This may have an impact not only on determination of the cost and period but also on a transfer of GDRs between two non-residents outside India.

To sum it up, the Finance Minister has made an effort in the right direction to redress some of the concerns created on taxation of GDRs. However, for GDRs to be a more successful instrument to raise funds abroad, clarity is also needed on various other aspects related to taxation of GDRs, so that India is considered as the most preferred destination when it comes to emerging markets.  

(Views expressed personal)


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