SEBI opens depository receipts for REITs and InvITs, but only GIFT City exchanges can list them for now

A depository receipt, or DR, is a foreign currency instrument issued by a foreign depository on the back of underlying securities kept with a domestic custodian. The holder gets exposure to the Indian asset without buying it directly in India. Under the new framework, the underlying is units of a REIT or InvIT, and the DR must be listed on an international exchange.

REITs own income-producing property such as offices and malls, and InvITs own infrastructure such as roads and power lines. Both pay out most of their cash flows to unitholders. The rules for DRs on company shares have existed for years. Regulations then allowed DRs on trust units in such manner as SEBI might specify, and the circulars fill that gap.

There are two ways to create DRs. A trust can issue new units, or existing unitholders can transfer units, in which case the trust must give all unitholders an opportunity to tender theirs.

The main conditions

Eligibility is also spelled out. The trust must be compliant with SEBI's regulations. The trust, its parties and their directors, promoters and partners must not be debarred from the capital market, must not be wilful defaulters and must not be fugitive economic offenders. Past debarment that has ended does not count.

Some technical rules matter for investors. Units held by a depository for DRs count as non-public holding for the minimum public unitholding test. A person's units in India are added to units underlying DRs when checking holding limits. And a foreign depository cannot issue DRs until the domestic custodian confirms receipt of the units. There is also two-way fungibility, so DRs can be cancelled and reissued within limits.

Why it matters

India's real estate and infrastructure trusts need long-term money. A road or an office park earns steady income over decades, and this suits pension funds and insurers. Many of those investors, however, prefer dollar instruments and an offshore-style legal environment. A DR at GIFT City gives them a foreign currency product under IFSC rules.

For trusts, the benefit is another pool of buyers without having to wait for foreign investors to set up in the domestic market. For India's push to build GIFT City into a real financial centre, it adds one more product that cannot easily be found elsewhere.

There are reasons for caution. GIFT City's exchanges are young, so liquidity in a DR could be thin. Pricing protection helps domestic holders but limits discounting, which may reduce appeal to foreign buyers who expect one. And currency risk falls on the DR holder, since the units earn rupees while the DR is priced in foreign currency. Critics will say that without access to the world's largest exchanges, the framework is more symbolic than practical. However, starting inside an Indian jurisdiction lets regulators test the product under their own oversight before any wider opening.

The circulars also try to keep the two markets honest with each other. Any disclosure made on the international exchange must be filed in India within 24 hours, so a foreign holder cannot learn something before a domestic one, and a DR holder's stake is added to any direct holding when limits are tested.

For an Indian retail unitholder, nothing changes directly, as Indian residents cannot hold these DRs. The practical effects are the vote on a fresh issue and possible dilution, and those are protected by the 75% threshold and the pricing floor.

The first test is whether any trust files. A merchant banker must prepare an offer document, the manager must get unitholder approval, and agreements must be signed with a foreign depository and a domestic custodian. SEBI has retained power to issue clarifications through guidance notes or circulars.

The bigger question is whether the list of permitted jurisdictions grows. The Depository Receipts Scheme, 2014 allows for other locations, but SEBI has named only IFSC exchanges in these circulars. If the first issues do well, the argument for adding foreign venues will strengthen.

For now, this is a careful first step: a new instrument, a narrow door and strong rules on who can pass through it.

This article is for information and is not investment advice.