Fresh look at share convertibility issue likely

Subhomoy Bhattacharjee

The ambitious plan to make domestic shares freely convertible between local and foreign stock exchanges is likely to figure in the finance minister's Budget speech again this year, since the scheme announced in the last Budget has been found to be unworkable as long as there are sectoral caps on foreign direct investment.

The Reserve Bank of India has informed the finance ministry that it cannot take up the task of daily monitoring the stock flows in and out of the country.

When contacted, the bank said: "We are still awaiting the details of the scheme from the government". But sources said it is not possible for the bank to take on such responsibility as it will involve acting as the custodian of the shares and monitoring on a real-time basis whether the FDI cap on any company has been breached in the share transactions.

The plan for a two-way fungibility of American depository receipts and global depository receipts was announced by Finance Minister Yashwant Sinha in the last Budget to infuse greater liquidity in the share markets.

Simply put, this meant anybody who had ADRs\GDRs could open the underlying shares (usually three) and sell them in the exchange at the rupee value.

Similarly, the shares could also be converted into ADR\GDR denominated in foreign currency for the purpose of selling them abroad.

But to do this seamlessly there was a need for a custodian who would monitor the movement of shares in and out of the country. Since conversion of ADR\GDR will change the level of foreign holding in a company, the custodian will also have to watch out if the sectoral cap on FDI with respect to that particular company is being breached or not.

The high level committee including senior officials from the RBI, finance ministry and Securities and Exchange Board of India had debated the issue but there has been no satisfactory solution.

The RBI has said that it should be the responsibility of the market regulator but Sebi has said that since it also involved currency movement the issue should be handled by the former.

Finance ministry officials said the promise by the finance minister last year was premature as the relevant homework on the issue had not been done.

While both the RBI and finance ministry termed it as a non policy issue, at stake is the operationalisation of the scheme which had been mooted by FIIs also. Incidentally, the scheme was among the first to be notified by the RBI just two days after the Budget on March 2, 2001 under FEMA regulations.

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