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Indian depository receipts and how to make use of them

Indian depository receipts and how to make use of them
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First Published: Tue, May 25 2010. 10 31 PM IST
Updated: Tue, May 25 2010. 10 31 PM IST
The stock market has got a new product—Indian depository receipts (IDRs). You can now invest in it in the hope of making money over the long term. It is like an equity share, but with subtle differences. The Indian equity market trades shares of companies that are listed in India, the companies can be Indian or foreign, but need to have a significant business presence in India and must be here for Indians to buy shares in them. For example, Hindustan Unilever Ltd is a subsidiary of Unilever Plc, an international consumer goods company, but has a large business footprint in India and is listed on the Bombay Stock Exchange and the National Stock Exchange.
But if you want to own a piece of international firms such as Microsoft Corp., Google Inc. and Apple Inc., it is a difficult process that most retail investors find clunky.
What happened till now?
The Reserve Bank of India (RBI) has allowed investments in international equity instruments up to $200,000 (Rs94.8 lakh). However, since you need to have a demat account in the country in which you invest and a bank account with funds in the same country’s currency, it may turn out to be a cumbersome process.
Another alternative is to go through a domestic mutual fund (MF) that invests its corpus abroad in a foreign fund, which invests in international companies or directly in scrips. But MFs are directly affected by currency-exchange risk because your investments in Indian rupees are converted into global currencies before they are deployed in the international markets. The recent winding up of Franklin India International Fund, a feeder fund that invested in US government securities, besides underperformance by several other international funds over the past three years, shows that these funds are fraught with exchange-rate and global market risks.
What is an IDR?
Now, you have the option of buying an IDR instead. An IDR is a depository receipt denominated in Indian rupees issued by a domestic depository in India. Much like an equity share, it is an ownership pie of a company. Since foreign companies are not allowed to list on Indian equity markets, IDR is a way to own shares of those companies. These IDRs are listed on Indian stock exchanges. You need not take the trouble of taking your money abroad yourself, but can invest rupees into the international companies that have now begun to come at your doorstep.
These are international firms that have subsidiaries or branches working in India. But since these subsidiaries are not listed, the firms offer shares to Indian investors. Standard Chartered Plc is the first firm to come out with an IDR issue, offering its international shares through IDRs.
Why do you need an IDR?
An IDR is meant to diversify your holdings across regions to free you from a “region bias” or the risk of a portfolio getting too concentrated in the home market. You need to study the firm’s financials before you buy its IDR. However, since these IDRs are listed, bought and sold on the Indian markets, the impact of global markets and exchange-rate risks are reduced, though not totally eliminated.
IDRs and equity shares
IDRs are similar to equity shares. IDR holders have the same rights as shareholders; you can vote for or against company moves or decisions as and when it comes to you, get dividends, bonus and rights issues as and when the company declares them.
How are IDRs taxed?
IDRs are taxed differently from equity shares. If you sell an IDR within a year of purchase, your gains will be taxed at your income-tax rates. For exits made after a year, the tax rate will be 10% without indexation and 20% with indexation. Since the IDR does not deduct dividend distribution tax, dividends are taxed in your hand as per your income tax rates. IDRs also don’t impose securities transaction tax.
Is there a currency risk?
In theory, the price of the underlying share of the international firm at the foreign exchange and the exchange rate would play a role in determining the price of the IDR on the domestic exchange. But, in practice, this may not play out fully because the IDR would need to be bought and sold in Indian rupees and its price discovery would happen based on demand and supply, just like any other equity share. Dividends declared by the firm will be distributed in foreign currency and this would be then converted to Indian rupees at prevailing exchange rates.
How can you apply?
You can apply for an IDR the way you apply for equity shares. The facility of Application Supported by Blocked Amount is also available for IDR holders. In other words, your application money won’t leave your bank account till you are finally allotted the shares. The money is blocked, but continues to earn interest on it. If you aren’t allotted shares, or IDRs in this case, the money is released.
kayezad.a@livemint.com
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First Published: Tue, May 25 2010. 10 31 PM IST