Several Indian firms have successfully raised capital by issuing global depository receipts (GDRs) in the overseas markets, be it Luxembourg or London or Singapore or the Americas. In 2004, the Central government paved the way for foreign firms to tap the Indian capital markets through Indian depository receipts (IDRs)—the Indian avatar of GDRs.
Given the stringent eligibility criterion then prescribed, the instrument did not evoke much interest and not a single IDR issue materialized. Recognizing the lack of interest, the regulations have been progressively liberalized; also, a lot has changed fundamentally. First and foremost, the gradual shift of financial power from the West to the East following the credit crisis, a broad-based and mature Indian equity market (primary and secondary) and last, but not the least, an aspiring investor class in India, buoyed by growing per capita income and higher savings rate.
In July, the Reserve Bank of India (RBI) issued a circular to operationalize IDRs from an exchange-control perspective. More recently, the Securities and Exchange Board of India (Sebi) has taken steps on the policy front to facilitate IDR issues by foreign multinational firms (MNCs) in India, be it extension of the anchor investor facility or the 30% reservation for retail investors to ensure liquidity. Also, as new reports suggest, Standard Chartered is evaluating IDR plans. This article looks at key regulations governing IDRs and some related tax aspects.
What is an IDR?
An IDR is an instrument denominated in Indian rupees in the form of a depository receipt created against the underlying equity of the issuing firm. Essentially, the foreign firm would issue its equity shares to an overseas custodian bank, which in turn would authorize a domestic (Indian) depository to issue IDRs to investors. The IDR would be listed on a recognized stock exchange in India and traded like any other listed security. The IDR would derive value from the underlying equity shares of the foreign firm, and the holder would be entitled to participate in the dividends or other corporate actions (bonus, rights etc.), just as GDRs of Indian firms.
The issue and operation of IDRs are governed, primarily, by the Companies (Issue of Indian Depository Receipts) Rules, 2004 and the Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2009. RBI, on its part, has operationalized IDRs under the exchange control regime.
Regulatory framework
The IDR rules and Sebi regulations lay down the eligibility criteria for the issuing foreign company as under:
• Pre-issue paid-up capital and free reserves of at least $50 million (Rs234.5 crore)
• Average market capitalization (over the last three years) in the home country should be at least $100 million
• Continuous trading track record for at least the three preceding years
• Dividend track records for three out of five preceding years
• Continuous listing and compliance track record in the home country.