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TWO WAY FUNGIBILITY BACKGROUND The Reserve Bank of India, in line with the announcement made by the Finance

Minister, Government of India, in his budget speech of Feb 2001, issued a notification [The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendments) Regulations, 2001] on March 2, 2001 to introduce Two Way Fungibility in the Indian capital markets. As per the notification, non resident investors can purchase shares from the secondary market on any recognized stock exchange in India, through a registered Indian broker, for the purpose of conversion of those shares to ADRs / GDRs of that company. What Notifications are involved in the Two Way Fungibility? The following notifications are involved; Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993 and guidelines issued thereunder by the Central Government Foreign Exchange Management Act 1999 (Issued by Reserve Bank of India) Foreign Exchange Management Regulations 2000 (Issued by Reserve Bank of India) Foreign Exchange Management Regulations 2001 (Issued by Reserve Bank of India) Amendment to the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993, vide Government of India, Ministry of Finance, Dept of Economic Affairs (Investment Division) notification F.No. 15/7/99NRI dated 13th Feb 2002 Operating Guidelines issued by the Reserve Bank of India through A.P. (DIR Series) Circular No. 21, dated 13th Feb 2002. What is Two Way Fungibility? Two Way Fungibility means that the Depository Receipts can be converted into underlying shares and Underlying shares can be converted into Depository Receipts. Every Depository Receipt has underlying shares backing it. The depository receipts are issued and traded outside the country of the issuer, but the underlying shares backing the receipts are lodged in custody with a custodian in the country of the issuer.

How does the new amendment change the existing regulations? Under the existing regulations, prior to the amendment, no re-issuance of Depository receipts was permitted. Investors could only cancel the depository receipts and avail of the underlying shares or take back the proceeds by selling the underlying shares. Hence over a period of time, the outstanding balance of depository receipts would get reduced thereby reducing the liquid float of depository receipts to the international investors. Under the new amendments, investors desirous of holding depository receipts can purchase shares from the Indian stock market, through a registered broker and submit them for conversion into Depository Receipts. The purchased underlying shares would then get added with the shares lodged as underlying shares against depository receipts with the local custodian. This would not only increase the number of outstanding depository receipts, but also increase the available float in the international markets for investors. However, the regulation amendment currently only permits reissuances collectively upto the original amount of Depository receipts that were issued during the IPO. For eg, if the original issuance was 15 mln DRs in say, 1995, and outstanding number as on date was 12 mln DRs, then as per the amendment, investors can collectively seek reissuances of 3 mln DRs only. The regulations also states that the re-issuance should not violate the foreign sectoral cap restrictions and hence any request for conversion of shares into DRs would require the clearance from the local custodian. The headroom available for re-issuance is monitored by the custodian of the underlying shares in coordination with the depository bank, Company Secretary and the NSDL. Head Room = Number of ADRs / GDRs originally issued minus number of GDRs / ADRs outstanding further adjusted for ADRs / GDRs redeemed into underlying shares and registered in the name of non-resident investor(s).

Which Companies can have their Depository receipts re-issued? Any company who has an existing Depository Receipts programme can have their Depository Receipts re-issued. However the requirement for the re-issuances is that the shares should be purchased from a recognized stock exchange in India. This means that only companies listed on stock exchanges in India can offer re-issuances of

their depository receipts and therefore unlisted companies who have a Depository Receipts programme cannot offer re-issuances to their investors. Who can request for re-issuances? Any non-resident investor can put a request for conversion of shares to Depository receipts. However the sectoral cap restrictions would need to be maintained. What approvals are required for the re-issuances? The re-issuances would be under the existing set of approvals pertaining to the existing depository receipts programme. The issuer would have to comply with the requirements of the Indian stock exchange where its shares are listed and registered. The investor desirous of converting the shares into Depository Receipts would need an approval from the local custodian before submitting the shares for issuance of depository receipts. This is to ensure sectoral cap limits. What is the procedure for effecting a re-issuance? The following would be the sequence of events for a re-issuance Investor places a request with his broker for depository receipts through the re-issuance route. Broker contacts its counterpart in India to purchase proportionate local shares and submit them for re-issuance. The local broker counterpart contacts the local custodian with a request for approval under available head room and sectoral cap restrictions Local custodian compares the request against sectoral cap limits and if in order, earmarks the number of to-be-reissued depository receipts for the investor. He informs the local broker to go ahead with the purchase of shares. On the day next to the day of purchase of shares, broker is required to submit the purchase contract to the custodian for the earmarking to be formalized. If the same is not provided, the custodian would cancel the allocation. Local broker then on receipt of shares, submits the same to the custodian for lodging it into the underlying shares of the existing depository receipts. The local custodian would then confirm receipt of the shares to the Depository Bank and forward the request for re-issuance of DRs Depository Bank will issue the proportionate DRs to the investor.

Upto what extent can the company re-issue their DRs? The company can re-issue, at any point of time, upto the originally issued number of DRs. The available limit is dependent on the number of DRs cancelled at that point of time. What are the sectoral caps to be maintained? The Ministry of Finance and the Reserve Bank of India monitor foreign investment in industries. Certain industries have restrictions on the extent of foreign direct investment into that industry. Investment by way of purchasing depository receipts is considered as direct investment and hence would come under the sectoral limits. Can Unlisted companies offer re-issuances? No. The current amendment states that the local shares must be purchased from the secondary market through a recognized stock exchange. This would mean that the local shares of the company must be listed on that stock exchange. What is the ranking of the re-issued depository receipts as compared to the existing outstanding depository receipts? The re-issued depository receipts would rank pari-passu with the existing outstanding depository receipts What are the benefits of Two Way Fungibility to the issuer? The issuer can have the following benefits; Ability to increase the number of outstanding depository receipts to the original amount Increased liquidity in the international investor market due to more number of depository receipts available Increased stock price of the depository receipts due to increase in demand More flexibility in acquiring companies overseas, as the stock component can be increased in a cash and stock deal, thereby saving precious foreign exchange. What are the benefits of Two Way Fungibility to the Investor? Non residents can avail of the tax benefits under Section 115 AC of the Income Tax Act 1961 which is applicable to non resident investors in ADRs / GDRs offered against issue of fresh underlying shares. The same benefits will now be available to investors in ADRs / GDRs against existing equity shares. Higher float available on the DR stock and hence better liquidity.

The publication of this announcement shall be deemed not to constitute an offer or the solicitation of an offer to buy any Depositary Receipt or any security relating thereto in any jurisdiction in which such announcement would be deemed an unlawful offer. This announcement appears as a matter of information only.

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