Indian Depository Receipts - Concept to Commissioning

Indian Depository Receipts (IDRs): Concept to Commissioning

Introduction

The capital markets have seen a steady growth, despite the international disturbances like Iraq war, terrorism threats and other natural calamites. The favorable liquidity condition and macro environmental factors accelerated further growth in Asian markets. These factors have increased the demand for Asian equities.

Listing in the stock exchanges world over is an opportunity for the firms to raise funds globally. But there are several other aspects of listing in foreign stock exchanges besides just fund raising activity. Firms are using Depository Receipts as a vehicle either to sell stake or control blocks or as a means to change their governance structure. Firms incorporated in a jurisdiction with weak investor protection rights, often try to list themselves to more developed securities markets to legally bond themselves to higher disclosure standards and stricter enforcement. This in turn helps attracting investors, who would otherwise be reluctant to invest factoring in the risk of fraud and embezzlement. Beside this, firms listing in developed capital markets experience a shift in the ownership structure. Size and liquidity of home country’s market, extent of legal rules and investor protection, capital control regulations and FDI restriction are some of the significant predictors of cross country listing. Largest numbers of foreign companies are found listed in developed markets like NYSE, London and Luxembourg. Among the emerging markets cross listing is yet to pick up. At this outset, if we look into the Indian market, it is conducive for foreign firms to enter through the depository receipts route. Indian Depository Receipts is the vehicle that can be used by the foreign firms for cross-listing in India.

Advent of Indian Depository Receipts (IDRs)

Indian financial markets have come a long way since the adoption of New Industrial Policy framework by Indian government in 1991. There is an increasing trend towards the internationalization of Indian financial markets, driven mainly by the Indian government’s willingness to adopt liberalized and outward looking policy initiatives with regard to its financial markets. The Indian government has taken several policy initiatives to gradually open up its financial markets to the foreign investors and allow its own citizens to invest in the foreign financial markets. These initiatives include permitting:

(a)Indian firms to issue their Depositary Receipts (DRs) in the International markets in April 1992.

(b) Indian mutual funds to invest in debt securities of select countries as well as launch overseas debt funds in February 2002.

(c) Indian investors to buy shares of foreign companies that had a listed Indian subsidiary in April 2003.

(d) The resident Indians to remit $ 25,000 a year for investing in the foreign assets of their choice in January 2004.

Latest policy initiative in this regard has come in form of �Companies (Issue of Indian Depository Receipts) Rules, 2004’, which were issued by the Department of Company Affairs (DCA) on 23rd Feb 2004. These rules permit the eligible foreign firms to raise funds from the Indian capital market by listing the Indian Depository Receipts (IDRs) on the Indian stock exchanges.

Definition: Indian Depository Receipt is a receipt, evidencing and underlying foreign security, issued in India by a foreign company which has entered into an agreement with the issuer and depository, custodian and depository or underwriters and depository, in accordance with the terms of prospectus or letter of offer, as may be prescribed. In short they are like shares but of a foreign company trading on a local stock exchange.

The concept of an IDR can be understood as a mirror image of the familiar ADRs/GDRs (American Depository Receipts/ Global Depository Receipts). In a typical IDR program, an overseas company would issue its equity shares denominated in its local currency (may be in $) to an Indian Depository, which in turn, would issue IDRs denominated in Indian Rupees to the investors in India. The actual equity shares of foreign issuer underlying the IDRs would be registered in name of Indian depositary and are kept with the overseas �custodian bank’. Figure below depicts the mechanism for floatation of a typical IDR program. The overseas Custodian is required to be a foreign bank having a place of business in India and needs approval from the Finance Ministry for acting as a custodian while the Indian Depository needs to be registered with SEBI (Securities and Exchange Board