In an effort to encourage foreign companies—from both developed and emerging markets—to list on Indian stock exchanges, the government has decided to relax the existing norms for Indian depository receipts (IDRs).
The changes, the government hopes, will kickstart an initiative that found no takers after it was launched in 2004, simply because the requirements to make an IDR issue were too stringent
The move, which comes at a time when international exchanges such as the New York Stock Exchange (NYSE) and Deutsche Borse have started taking equity stakes in Indian stock exchanges, is a logical next step in the globalization of Indian stock markets and an eventual move to full convertibility of the rupee.
IDRs are instruments similar to shares and will be listed on stock exchanges such as the Bombay Stock Exchange and the National Stock Exchange. However, people who hold IDRs will not have any voting rights. They present an investment opportunity for Indians. And they present an opportunity for companies that wish to raise money in the Indian market. If the valuation of the subsidiaries of transnationals that are listed here are any indication, the IDRs should do well.
At present, Indians are permitted to acquire foreign equity, but have to stick to an annual limit of $50,000.
The ministry of company affairs, which is in charge of changing the requirements, has put up a draft proposal on its website, inviting comments by 28 March.
“The ministry has already started receiving suggestions on the website and based on the feedback it receives and its own study, new rules relating to IDRs will be issued,” a senior official told Mint on the condition of anonymity.
The new rules halve the minimum paid-up capital and free reserves of the issuing company to $50 million; drop the criterion of average turnover of $500 million in the three years preceding the issue of IDR; require the company to have made a profit in only three out of the five years preceding the issue (the old norms required the company to make a profit in all five years); do not specify any recommended debt-equity ratio (the old rules specified a 2:1 ratio); enhance the size of IDR offerings to 25% of the post-paid capital of the company as opposed to the existing limit of 15%; and allow publishing of unaudited quarterly results subject to limited review by auditors.
The government has also proposed that prior clearance from stock market regulator Sebi will no longer be mandatory for any company that wishes to make an IDR issue and that it would only be required to file a prospectus with the regulator.
“It’s high time rules relating to IDRs are changed. I studied every single IPO in 2005-06 and not a single Indian complied with all these norms. How do you expect foreign companies to comply? No wonder, IDR remained a dead instrument till now,” said Prithvi Haldea of Prime Database, an independent research outfit tracking the Indian primary market.
The change in rules should see companies finally coming forward to make IDR issues, said other analysts.
“Today, India is a vibrant economy and foreign companies’ faith in the Indian market is rising. I am sure with easier norms there will be takers for IDRs,” said Pavan Vijay, a former president of the Institute of Company Secretaries of India (ICSI).
But not everyone is upbeat. “Where is the depth in the Indian stock market?” asked the head of one of India’s largest investment banks, who did not wish to be identified. He added that India, despite the recent boom in stock markets, remains a country where capital is scarce. An IDR issue does not make sense, he said.
Sanjiv Shankaran contributed to this story.