Indian Depository Receipts

Indian Depository Receipt (IDR): An Indian Depository Receipt is a financial instrument in the form of a depository receipt denominated in Indian rupees. Indian Depository Receipts are created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets.

Central Government notified the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) pursuant to Companies Act. Disclosure guidelines were issued by SEBI with respect to IDRs. Also, SEBI notified the model listing agreement to be entered between Stock Exchange and the foreign issuer specifying continuous listing requirements.

Eligibility criteria to issue IDRs:

The foreign issuing company shall meet criteria enumerated below:

Preâ€issue paidâ€up capital and free reserves: The company should have preâ€issue paidâ€up capital and free reserves of at least US$ 50 million and have a minimum average market capitalization (during the last 3 years) in its home country of at least US$ 100 million.

Should have been listed in home country: It should have been listed in its home country and not been prohibited to issue securities by any Regulatory Body and has a good track record with respect to compliance with securities market regulations in its home country

Trading record in its home country: The company should have a continuous trading record or history on a stock exchange in its home country for at least 3 immediately preceding years.

  • It should have a track record of distributable profits for at least 3 out of immediately preceding 5 years.

Minimum size of an IDR issue:

The size of an IDR issue shall not be less than Rs. 50 crores

Listing permission:

The issuer company is required to obtain in-principle listing permission from all the recognized stock exchanges in which the issuer proposes to get its IDRs listed

Issue process:

The issue process is more or less similar to an IPO. A foreign company having met the eligibility criteria may arrange the required intermediaries in its home currency as well as in India. Then, issuer is required to file the draft prospectus with SEBI while complying with the requirements of SEBI (ICDR) Regulations, 2009.

Shares underlying IDRs will be deposited with an overseas custodian who will hold shares on behalf of a domestic depository. Overseas Custodian Bank is a banking company which is established in a country outside India and has a place of business in India and acts as custodian for the equity shares of issuing company against which IDRs are proposed to be issued in the underlying equity shares of the issuer is deposited.

IDRs will be issued by a domestic depository, who is a custodian of securities, registered with SEBI and authorized by the issuing company to issue Indian Depository Receipts. After issuance, The IDRs are required to be listed in at least one stock exchange in India having nationwide terminals.

Conversion of IDRs into Equity shares:

Subject to the compliance of the related provisions of Foreign Exchange Management Act and Regulations issued thereunder by RBI & SEBI, IDRs can be converted/ redeemed into the underlying equity shares. But this is possible only after the expiry of one year from the date of the listing of the IDRs. This facility will be available only during the fungibility window. Fungibility window is the time period specified by the issuer company during which IDR holders can apply for conversion/redemption of IDRs into underlying equity shares.

Requirements for investing in IDRs:

  • Any person who is resident in India (as defined in FEMA) can buy the IDRs
  • Minimum application amount in an IDR issue shall be Rs. 20,000
  • Investments by Indian companies in IDRs shall not exceed the investment limits, if any, prescribed for them under applicable laws
  • At least 50% of the IDRs issued shall be subscribed to by Qualified institutional buyers (QIBs)
  • The balance 50% shall be available for subscription by non­-institutional and retail investors

Merits of IDRs:

  1. IDRs pave the best possible way for the foreign companies to raise funds from Indian market, thus an effective way to build its brand before commencing any full time operations.
  2. IDRs help the foreign companies expand their reach to international investors meeting the wider demand for its shares around the globe.
  3. Investors in the Indian securities market having interested in the foreign companies do not have to go through the international procedural hurdles and cumbersome clearances to purchase a piece of equity in foreign companies. IDRs act as a simple medium to invest in their equity

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