Indian Depository Receipts

What is Indian Depository Receipt (IDR)? An IDR is a receipt, declaring ownership of shares of a foreign company. These receipts can be listed in India and traded in rupees. Just like overseas investors in the US-listed American Depository Receipts (ADRs) of Infosys and Wipro get receipts against ownership of shares held by an Indian custodian, an IDR is proof of ownership of foreign company's shares. The IDRs are denominated in Indian currency and are issued by a domestic depository and the underlying equity shares are secured with a custodian. An Indian investor pays in Indian rupees for the IDR whereas a shareholder in the issuer's home country pays in home currency.

What is the security of the underlying shares? Where will the receipts be deposited? The underlying shares for IDRs will be deposited with an overseas custodian who will hold the shares on behalf of a domestic depository. The domestic depository will accordingly issue receipts to investors in India. Investors will get an entry in their demat accounts reflecting their IDR holding. How will IDRs be issued? Who can participate? IDRs will be issued to Indian residents in the same way as domestic shares are issued. The issuer company will make a public offer in India, and residents can bid the same way as they do for Indian shares. Investors eligible to participate in an IDR issue are institutional investors, including FIIs but excluding insurance companies and venture capital funds retail investors and non-Institutional Investors. NRIs can also participate in the Issue. Commercial banks may participate subject to approval from the RBI. What are the benefits that Indian investors can look forward to? Indian individual investors have restrictions on holding shares in foreign companies, but IDR gives Indian residents a chance to invest in a listed foreign entity. No resident individual can hold more than $200,000 worth of foreign securities, including shares, as per foreign exchange regulations. However, this will not be applicable for IDR. Besides, these additional key requisites such as demat account outside India to hold foreign securities, KYC with foreign broker, foreign ban account to k hold funds are too cumbersome for most investors. These troubles are completely avoided in holding IDRs. Will Indian investors get equal rights as shareholders? Indian investors have equivalent rights as shareholders. They can vote on EGM reso lutions through the overseas custodian. Whatever benefits accrue to the shares, by way of dividend, rights, splits or bonuses will be passed on to the DR holders also, to the extent permissible under Indian law. Can IDRs be converted? IDR holders will have to wait for an year after issue before they can demand that their IDRs be converted into the underlying shares. However this conversion is subject to certain conditions:

a) IDR Holders can convert IDRs into underlying equity shares only with the prior approval of the RBI. b) Upon such exchange, individual persons resident in India are allowed to hold the underlying shares only for the purpose of sale within a period of 30 days from the date of conversion of the IDRs into underlying shares c) Current regulations do not provide for exchange of equity shares into IDRs after the initial issuance i.e.reverse fungibility is not allowed. India is gradually moving towards capital account convertibility and Indian investors are looking out for investment opportunities outside India. In the past couple of years, there have been several deals wherein Indian companies have made overseas acquisitions. Considering the exchange control regulations there are very few opportunities for the Indian investors to participate in global capital markets. Investments in indian depository receipts (IDRs) appear to be an interesting opportunity for the Indian investors to satisfy their appetite for the foreign equity. This article gives a basic introduction to IDRs. IDRs are Indian counter parts of ADRs or GDRs through which several Indian companies have raised funds from the overseas investors. Through IDRs it may be possible for the foreign companies to raise funds from Indian investors and it would be possible for the Indian investors to invest in equity shares of foreign companies. The IDRs would have the equity shares of the overseas issuer company as underlying assets. The shares issued by the overseas company would be held by an overseas custodian bank and on the basis of these underlying shares the Indian depository bank would issue IDRs to the Indian investors. The Indian IDR holders would thus indirectly own the equity shares of the overseas issuer company. However, the Indian investors may have to pass certain regulatory hurdles before they can directly own such equity shares. The relevant regulations contemplate possibility of conversion of IDRs into the underlying shares after one year. Such conversion of IDRs into equity shares of the overseas companies would be subject to the exchange control regulations. For this, one may have to wait for some more time till India further progresses towards full capital account convertibility. IDRs would be listed on Indian stock exchange and denominated in Indian currency. Since the underlying asset for the IDRs would be foreign shares, the market value of such shares outside India as well as the currency value would be reflected in the valuation of the IDRs in Indian rupee terms. Dividends declared by the foreign issuer company would be passed on to the Indian IDR holders through the Indian depository. The Indian investor can either sell the IDR to another Indian resident, or redeem the IDRs and sell the underlying equity shares outside India or may directly hold the underlying equity shares. However, some changes may be required in the exchange control regulations for this purpose. The regulatory framework for IDRs is being set up. The process started way back in the year 2000, wherein Section 605A was introduced in the Companies Act permitting foreign companies to issue IDRs. In the year 2004, the department of company affairs issued rules for IDRs, which contemplated issuance of guidelines by the Securities and Exchange Board of India (Sebi). Recently, Sebi has issued guidelines for the IDR issues.

The regulations contain some safeguards to ensure that the companies raising funds from India are financially sound. This also seeks to protect the interest of the Indian investors. The criteria require the issuer company to be listed in its home country, to have earned profits and declared dividend of at least 10% in last 5 years, etc. NRIs and FIIs are not permitted to purchase or possess IDRs without prior permission of the RBI. Sebi guidelines permit only qualified institutional investors to subscribe to IDRs, whereas the regulations under the Companies Act contemplate even individuals to purchase IDRs. The minimum amount required to be invested is Rs 2,00,000 and some clarification may be expected permitting individuals and other investors to invest in IDRs. It is desirable that the tax implications of the income arising from transactions in IDRs are clarified well in advance. If IDRs, listed equity shares, units are to be given at par tax treatment then appropriate changes need to be carried out in the Act. Further, the Indian tax implications of conversion of IDRs into underlying shares and vice versa also need to be clarified. If the income arising from IDRs attracts some tax liability in the foreign country then the Indian investors may claim credit for the taxes paid in such overseas country. The IDRs represent a good opportunity for the Indian investors. However, certain tax and regulatory aspects need to be sorted out before it becomes fully operational. What are Indian Depository Receipts (IDRs)?

IDRs are like American Depository Receipts or Global Depository Receipts, except that the issuer is a foreign company raising funds from the Indian market. IDRs are rupee-denominated and created by a domestic depository against the underlying equity shares of a foreign company. Who can issue IDRs? Any company listed in the country of incorporation can issue IDRs. Besides, the issuer needs preissue capital and free reserves of at least $50 million (around Rs 225 crore) and should have a market capitalisation of $100 million (Rs 450 crore) or more during the last three years. The company should have also made profits in three of the preceding five years. How will it work? The process is similar to an initial public offering where a draft prospectus is filed with the Securities and Exchange Board of India [ Images ]. The minimum issue size is $500 million (around Rs 2,250 crore). Shares underlying IDRs will be deposited with an overseas custodian who will hold shares on behalf of a domestic depository. IDRs will be issued through a public offer in India in the demat form and will be listed on Indian exchanges. Trading and settlement will be similar to those of Indian shares. At least half of the investors have to be qualified institutional investors with 30 per cent of the issue size reserved for small investors. Recently, the regulators allowed a single institutional investor to acquire up to 15 per cent of the issue size. In addition, banks have also been allowed to participate.

For a retail investor, the annual $200,000 ceiling (Rs 90 lakh) on overseas remittances, which can be used to buy shares, will not apply to IDRs, as the issues are rupee-denominated. Will Indian investors get equal rights as shareholders? Except attending annual general meetings and voting on resolutions, other rights are available. Are there tax issues? IDRs are not subject to securities transaction tax. Besides, dividends received by IDR holders will not be subject to dividend distribution tax. But, at present, exemption from long-term capital gains tax and concessional short-term capital gains are not available for secondary sales on the stock exchanges. However, the issue is expected to be resolved with the implementation of the Direct Tax Code. What are the benefits for the issuing company? The main benefit is in terms of branding, besides allowing foreign companies to access Indian capital. It is also seen as the platform for creation of acquisition currency and a management talent pool. Issuers have the option to reserve a proportion of the issue for employees. Q:What is an Indian Depository Receipt (IDR)? A:An IDR is a mechanism that allows investors in India to invest in listed foreign companies, including multinational companies, in Indian rupees. IDRs give the holder the opportunity to hold an interest in equity shares in an overseas company. IDRs are denominated in Indian Rupees and issued by a Domestic Depository in India. They can be listed on any Indian stock exchange. In other words, what ADRs/GDRs are for investors abroad with respect to Indian companies, IDRs are for Indian investors with respect to foreign companies. Q:What does an IDR represent? A:Each IDR represents proportional ownership interest in a fixed number of underlying equity shares of the issuer company. For example, in the recently concluded IDR issue of Standard Chartered Bank, 10 IDRs represent 1 equity share of the the Bank. Q:What are the parties involved in IDR issue and what are their roles? A:The principal parties in the IDR issue are the issuer company, the Overseas Custodian, the Domestic Depository and the Registrar & Transfer Agent. Issuer Company is the foreign company which wants to raise money through issue of IDRs. It must be listed in its country of incorporation. Domestic Depository is an Indian entity appointed by the issuer company and registered as a custodian of securities with SEBI. Domestic Depository issues IDRs representing underlying equity shares of the issuer company to investors in India and acts as a trustee on behalf of the IDR holders. Its rights and obligations are specified in the Deposit Agreement signed between the issuer company and the Domestic Depository.

Overseas custodian is the holder of equity shares on behalf of the Domestic depository and is appointed by Domestic Depository. Registrar and Transfer Agent (R&T Agent) provides services to the issuer company, the Domestic Depository and the IDR holders in India primarily being registration and transfer of IDRs in India. Examples of services include keeping records of the IDR holders, coordinating corporate actions and handling investor grievances. Q:Who is eligible to subscribe to IDRs and in what proportion is an IDR issue allocated between different categories of investors? A:Similar to an IPO in India, Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NII) like Corporate, high networth Individuals (HNIs) and Non-resident Indians, retail Individual Investors and employees can participate in IDR issue. Minimum 50% of the issue should be allotted to QIBs whereas 30% of the issue should be offered to retail individual investors. Balance 20% to be apportioned between NIIs and Employees at the discretion of the issuer company. Under-subscription in any of the categories other than the QIB category can be adjusted against oversubscription in other investor categories. Q:What are the minimum and maximum limits of bids in an IDR issuance? A:Retail Investors: Minimum of Rs 20,000 and maximum of Rs 100,000. NII: Non-institutional investors have to invest above Rs 100,000 up to the issue size. QIBs: Institutional investors above Rs100,000 up to the issue size. No IDR holder can individually own more than 5% of the total IDRs issued except for QIBs which can hold up to 15% of the IDR issued. Q:What are the rights of and IDR holder? A:An IDR holder is entitled to rights similar to an equity share holder like voting, bonus and right issues, dividends and other rights as other equity shareholders are eligible. In any case, rights and obligations of the IDR holders will be specified in the Deposit Agreement. Q:How does investing in IDRs differ from investing in shares of foreign company listed on foreign exchanges? A:Indian individuals can invest in shares of foreign companies listed on foreign exchanges only upto $200,000 and the process is costly and cumbersome as the investor has to open a bank account and demat account outside India and comply with Know Your Customer (KYC) norms of respective companies. It also involves foreign currency risks. IDR subscription and holding is just like any equity share trading on Indian exchanges and does not involve such hassels. Q:What is the tax treatment on IDRs? A:Trading of IDRs- Securities transaction tax (STT) is not applicable on trading of IDRs and thus capital gain transfer of IDRs will be applicable.

Dividends-The issuer company doesn t pay dividend distribution tax and hence dividends received on account of holding IDRs will be payable by IDR holders. Q:Why would foreign companies come to India and list themselves in India? A:Companies could have different objectives for listing in India like:
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It provides enhanced local branding and target business opportunities in India. It gives access to the large Indian capital pool and creates opportunities for future fund raising. It provides a currency for any acquisition in India which otherwise would be possible only through cash.

Q:Can IDRs be converted into equity shares and can the issuer company issue further IDRs in the future? A:Under present regulations, conversion of IDRs to equity shares is not permitted. An issuer company may issue further equity shares based on which additional IDRs may be issued in the Indian markets. This may happen in the case of bonus issue, rights issue or issue of shares in case of any change in the par value, sub-division, consolidation or other reclassification of underlying equity shares or upon any reorganisation, merger or consolidation of the issuer company.