Indian Depository Receipts-Legislation, Merits, IDR Issuance Procedure
Indian Depository Receipts-Legislation, Merits, IDR Issuance Procedure

 

Indian Depository Receipts (IDRs) is a financial instrument denominated in Rupees to create an opportunity for foreign companies to raise fund from Indian Stock markets by offering entitlements to foreign equity. IDR enables a foreign company to mobilize funds from the India stock markets by issuing IDRs.

The Indian Depository Receipts was initiated by the government to globalize the Indian Capital Market and allow local investors entry into foreign companies.

Equity shares are issued by foreign companies in their home country are offered to foreign custodians through IDRs. The custodian will then approve for the issuance of IDRs by Indian Depository against the foreign shares. The IDRs issued will be traded in the Indian Capital Market.

Illustration of IDR:

A US-based company, Wendy Inc offers equity shares in the tune of $15 per share which is delivered to a bank in the US. The Indian Depository Ltd will then issue IDRs based on the foreign shares in India after receiving authorization from the bank in the USA.

If the exchange rate is Rs 50 to $1, the IDR issued will be traded at Rs 500 in the Indian market. In an event that the price of the share in the US market is increased to $20 each, the change will cause the value of IDR trading in India to have an upward shift to Rs 1000.

The foreign exchange laws of India govern the repatriation of proceeds of the IDRs.

Dividends from IDRs are distributed to the holders based on the shares of the IDRs by the domestic depository.

MERITS OF INDIAN DEPOSITORY RECEIPTS- IDRs

  • Allows more access to liquid markets.
  • The funds provided are lower in costs and terms.
  • The investor base of the issuing company becomes expanded.
  • Marketing advantages become available because of an improved brand image.
  • The possibility of a hostile takeover is reduced.
  • The risk associated with foreign exchange is eliminated since the dividend is paid by the issuers home currency.
  • The international demand for shares can be exploited through IDR.
  • The global demand for shares of a company becomes a possibility.
  • It provides a means for investment diversification and wealth protection.
  • It protects the investor against any downturn within his local economy.

 

LEGISLATION ON INDIAN DEPOSITORY RECEIPTS

The primary laws that are related to Indian Depository Receipts are contained in:

  • Section 605A of the 1956 companies Act.
  • SEBI 2009 regulations on an issue of capital and disclosure requirement.
  • 1956 Act on Securities Contract Regulations.
  • RBI guidelines
  • 2004 IDRs Rules.
  • FDI guidelines.
  • Companies issue of share capital with differential vote rights rules, 2001.

WHO CAN ISSUE IDR?

The eligibility criteria provided in IDR guidelines and rules are as follows:

  • Issuing company must be listed in the home country.
  • The issuing company must not be prohibited by any regulatory body from issuing of securities.
  • Issuing company must have a reputation for adhering to home country guidelines on security markets.
  • Issuing company should have a pre-issue paid-up capital and minimum free reserve of $50 million

INTERMEDIARIES INVOLVED IN THE ISSUANCE OF IDR

  • The foreign custodian bank serves as a banking company established outside the shores of India and owns an operational base in India and acts as a custodian for the equity shares from the foreign company for which IDR is issued for the equity shares.
  • Depository in India which acts as a custodian for securities and is registered with SEBI and must be approved by the issuing company.
  • Merchant Banker through which the draft prospectus for the issuance of the IDR and due diligence certificate is filed with SEBI by the issuer company. The Merchant Banker must be registered with SEBI.

 

REQUIREMENTS FOR ISSUE OF INDIAN DEPOSITORY RECEIPTS

Issues of IDR must satisfy the following conditions:

  • The size which has been issued shall not exceed Rs 50 Crore.
  • Each class of applicant must follow the procedure outlined in the prospectus to apply.
  • The minimum amount for application is Rs 20,000.
  • On professional institutional buyers shall be allotted a minimum of 50% of the IDR issued based on proportion.
  • The 50% of the IDR to be allocated must be offered to investors in the non-institutional and retail category along with employees as the issuer sees fit. The prescribed details for allocation must be provided in the prospectus. Each allotment for a category must be by proportion.
  • The denomination of IDR must be one at a time for each issuing company.

REQUIREMENTS FOR INVESTING IN INDIAN DEPOSITORY RECEIPTS

  • Any person who is resident in India can purchase an IDR as stated under FEMA.
  • The minimum amount for application for an IDR issue is Rs 20,000.
  • Indian companies should not exceed her investment limits if any as provided in the law.

FUNGIBILITY WINDOW

Fungibility window is the time the issuer company specifies within which IDR holders apply for either conversion or redemption of IDRs into available equity shares.

MINIMUM SUBSCRIPTION OF INDIAN DEPOSITORY RECEIPTS

The guidelines for a minimum subscription of IDR is based on the non-underwritten issues and underwritten issues.

Non-underwritten issues:

  • The issuing company shall refund the entire subscription amount received if the minimum offer of 90% is not received by the issuing company through offer document on the date of closing of the issuance, or the fall of the subscription level on the close of the issue on the basis that applications were withdrawn or account of cheques being returned unpaid.
  • Where the issuing company does not refund the total subscription amount within 15days of ending the issuance, the company is bound to pay an interest at the rate of 15% per annum to the applicants for the period of delay.

Underwritten issues:

  • On account that the issuing company fails to receive 90% of the issuing amount through offer documents that include devolvement of underwriters within 60 days after the closure of the issuance, the entire subscription shall be refunded by the issuing company with an interest of 15% per annum for the 60-day delay period.

Where the issue of IDR is undersubscribed, the Merchant Banker shall make available the information of the underwriters who did not meet their underwriting devolvement to SEBI.

 

STEPS INVOLVED IN THE ISSUANCE OF INDIAN DEPOSITORY RECEIPTS

  • The foreign issuer will forward a request for authorization to SEBI. This request must be made available at least 90 days to the commencement of the issue. SEBI may require more details and explanations for processing the request.
  • The application will attract a $10000 non-refundable fee.
  • The issuing company is required to present necessary clearance documents from regulators in the home country.
  • It is the responsibility of the issuing company to appoint a custodian bank, merchant bank and a domestic depository to process the issuance of IDRs. The underlying equity and shares are delivered to the custodian banks by the issuing companies who will then authorize the issuance of IDR by the domestic depository.
  • The issuing company can choose the underwriters that are licensed by SEBI to undertake the underwriting of the IDRs.
  • A prospectus with SEBI and registrar of companies must be filed by the issuing company before the issuing date and must be certified by two approved signatories.

FILING OF DOCUMENTS FOR ISSUANCE OF INDIAN DEPOSITORY RECEIPTS

  • The Merchant Banker and the issuing company must enter into an agreement.
  • Where the issuing is to be undertaken by more than one banker, the roles and their responsibilities must be stated in the prospectus.
  • The issuing company is mandated to forward a draft prospectus to SEBI with the required fee through the Merchant Banker.
  • A due diligent certificate will be made available to SEBI through the merchant banker.
  • The certificate is to declare the authenticity and accuracy of the prospectus.
  • The Merchant banker will submit a due diligence certificate along with the prospectus to the registrar of companies.
  • A certificate that states the authenticity of the prospectus must be issued by the merchant bank before the issuance of IDRs.
  • The Merchant Bank will issue a certificate after the issuance is opened and must be before it is closed.

RESPONSIBILITIES OF THE ISSUING COMPANIES

  • It is the duty of the issuing company to create collection centers.
  • Advertise for the issuance in an English daily newspaper with wide coverage. This will be done soon after it had received clearance from the board on the filed prospectus.

DIVIDEND RELATED TO INDIAN DEPOSITORY RECEIPTS

IDR is for a percentage share of a single equity share. The dividend will be shared based on the proportion of the IDR holdings and the depository will distribute it to the holders.

TAXATION IN IDR

The present tax laws to take a bigger hold on IDRs more than other shares listed in the stock exchange of India. This makes IDR seem to be in a disadvantaged position with respect to taxation. All dividends from IDRs are taxed at a 30% rate with a surcharge of 10%.

Short-term capital gains on IDRs are charge at 30% rate unlike short-term capital gains in Indian stocks which are charged at 15% rate.

Investors pay a tax of 15% charge on the long-term capital gain on IDRs. However, this is bound to alter with the implementation of the proposed direct tax codes.

DISCLOSURES IN PROSPECTUS

All the materials contained in the prospectus will have a disclosure that it is true and accurate to allow investors to make the right investment decision. Therefore, the prospectus will contain:

  • The disclosures that are listed in the schedule to companies (Issue of Indian Depository Receipts) rules, 2004.
  • The disclosure in the manner stated in Part A of schedule XIX of ICDR

RISK OF THE INDIAN DEPOSITORY RECEIPTS

The following are the risks associated with the subject of IDRs:

  • The price of the IDRs is directly proportional to the local price of the underlying shares.
  • The overseas price or the local price can be altered by local factors.
  • There are uncertainties in the shares provided under IDRs prices.
  • The exchange risk and other hazards arising in the process are on the investor.

WILL INDIAN INVESTORS GET THE SAME SHARE RIGHTS AS SHAREHOLDERS?

Aside from the rights to attain annual general meetings and take part in votes, all other rights of a shareholder apply.

CAN PART OF THE IDRs BE REDEEMED OR CONVERTED TO SHARES?

An IDR holder is permitted to choose the number of IDR he or she can apply for either conversion or redemption.

CAN A NOMINEE BE APPOINTED BY THE IDR HOLDER IN EVENT OF DEATH?

At any time, an IDR holder has the liberty of nominating a person to whom his investment in IDR will be transferred to an event of death.

 

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