Indian Depository Receipts (IDRs)

Indian Depository Receipts (IDRs) are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India.

As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, Indian Depository Receipt is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited — NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorize the Indian Depository to issue the IDRs. The Indian Depository Receipts would have following features:

1. Overseas Custodian: Foreign bank having branches in India and requires approval from Finance Ministry for acting as custodian and Indian depository has to be registered with SEBI.
2. Approvals for issue of IDRs: IDR issue will require approval from SEBI and application can be made for this purpose 90 days before the issue opening date.
3. Listing: These IDRs would be listed on stock exchanges in India and would be freely transferable.

Eligibility conditions for overseas companies to issue IDRs:

1. Capital: The overseas company intending to issue IDRs should have paid up capital and free reserve of atleast $100 million.
2. Sales turnover: It should have an average turnover of $500 million during the last three years.
3. Profits/dividend: Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year during this period.
4. Debt equity ratio: The pre-issue debt equity ratio of such company should not be more than 2:1.
5. Extent of issue: The issue during a particular year should not exceed 15% of the paid up capital plus free reserves.
6. Redemption: IDRs would not be redeemable into underlying equity shares before one year from date of issue.
7. Denomination: IDRs would be denominated in Indian rupees, irrespective of the denomination of underlying shares.
8. Benefits: In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment.

How are IDRs different from GDRs and ADRs?

GDRs and ADRs are amongst the most common Depositary Receipts. When the depository bank creating the depository receipt is in the US, the instruments are known as ADRs. Similarly, other depository receipts, based on the location of the depository bank creating them, have come into existence, such as the GDR, the European Depository Receipts, International Depository Receipts, etc. ADRs are traded on stock exchanges in the US, such as Nasdaq and NYSE, while GDRs are traded on the European exchanges, such as the London Stock Exchange.

How will the IDRs be priced, and will cross-border trading be allowed?

IDRs will be freely priced. However, in the IDR prospectus, the issue price will have to be justified as is done in the case of domestic equity issues. Each IDR will represent a certain number of shares of the foreign company. The shares will be listed in the home country. Normally, the DR can be exchanged for the underlying shares held by the custodian and sold in the home country and vice-versa. However, in the case of IDRs, automatic fungibility i.e. the quality of being capable of exchange or interchange is not permitted.

What are the benefits of issuing IDRs to companies?

Currently, there are over 2,000 Depositary Receipt programs for companies from over 70 countries. The establishment of a Depositary Receipt program offers numerous advantages to non-U.S.companies. The advantages of issuing Indian Depository Receipts are;

• Expanded market share through broadened and more diversified investor exposure with potentially greater liquidity.
• Enhanced visibility and image for the company’s products, services and financial instruments in a marketplace outside its home country.
• Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions.
• Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in the parent company.
• Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.
• Diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market.
• Elimination of global custodian safekeeping charges, potentially saving Depositary Receipt investors up to 10 to 40 basis points annually.
• Familiar trade, clearance and settlement procedures.
• Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash distributions.
• Ability to acquire the underlying securities directly upon cancellation.

What are the Benefits of IDRs to Investors?

They allow global investing opportunities without the risk of investing in unfamiliar markets, ensure more information and transparency and improve the breadth and depth of the market. Increasingly, investors aim to diversify their portfolios internationally. However, obstacles such as undependable settlements, costly currency conversions, unreliable custody services, poor information flow, unfamiliar market practices, confusing tax conventions and internal investment policy may discourage institutions and private investors from venturing outside their local market.

Why will foreign companies issue IDRs?

Any foreign company listed in its home country and satisfying the eligibility criteria can issue Indian Depository Receipts. Typically, companies with significant business in India, or an India focus, may find the IDR route advantageous. Similarly, the foreign entities of Indian companies may find it easier to raise money through IDRs for their business requirements abroad.