Gift City mulls trade in Indian shares via depository receipts. What it means for investors

New Delhi: The International Financial Services Centre Authority (IFSCA), the regulatory body overseeing GIFT City’s international financial services centre, is considering permitting unsponsored depository receipts (UDRs) for Indian shares, two people aware of the matter said. This move would offer investors the opportunity to invest in Indian stocks and avail of tax benefits.

By introducing Indian UDRs, the International Financial Services Centre (IFSC) in Gift City aims to boost liquidity, attracting foreign funds seeking offshore alternatives to the Mumbai stock markets. The availability of Indian UDRs, coupled with significant tax benefits, is expected to bolster the attractiveness of IFSC, the people cited above said.

Currently, Gift City offers derivatives, debt products, and UDRs of foreign companies such as Apple and Google.

Depository receipts allow investors exposure to equities of foreign companies, with custodian banks facilitating the transactions by purchasing shares and issuing receipts. These receipts can be traded on designated stock exchanges, similar to regular shares. Sponsored depository receipts are initiated by companies themselves, while third parties introduce unsponsored depository receipts.

In the past, Indian companies such as Infosys, Wipro and HDFC Bank sold American Depository Receipts (ADRs), which are traded on the New York Stock Exchange. The idea was to attract foreign funds by listing in the US. The second category is UDRs, where the company does not initiate the issuance, as in the case of Apple shares that IFSC investors can currently buy. The stock exchanges based in the Gift City appointed a custodian bank which purchased an initial tranche of shares from the US and issued UDRs against it in the Gift City. Now, a similar framework is expected to be issued for UDRs against Indian shares.

An email sent to a spokesperson for IFSCA remained unanswered.

“Introduction of UDRs against Indian shares would make the IFSC more holistic jurisdiction for foreign funds, especially those who take limited exposure to India. Such funds need not go through the compliance burden of Mumbai markets and can also avail tax benefits,” said one of the people cited above.

Even the domestic brokers and retail investors, the person said, can use this route since the government has permitted the use of the Liberalised Remittance Scheme (LRS) for sending funds from within India to IFSC.

Currently, investors through IFSC, Gift City, can avail of a number of tax benefits, including exemption from securities transaction tax and stamp duty. Foreign funds can also avail of lower tax rates on capital gains at Gift City.

However, market participants expressed concern that introducing Indian UDRs in IFSC may lead to further migration of market segments from Mumbai to Gandhinagar. Recently, some key market segments, especially on the debt side, have started to migrate to Gift City since foreign funds can avail of lower withholding tax rates on such securities from Gandhinagar.

“The original idea of Gift City was to launch a global platform on the lines of Singapore or Luxembourg, which offer products across geographies. However, increasingly, products launched by the IFSC are competing with the onshore market in Mumbai,” the second person cited above said.

The UDR proposal will need approval from the government, and the onshore regulators can provide their opinion to the concerned ministries on it, the person said.