ABM-953

Self Study

On

“INDIAN DEPOSITORY RECEIPT “

Under the Supervision of: Submitted By:

Dr.Swami Prasad Saxena Vipul Khandelwal

Associated Professor M.PHIL.1th Sem.

Department of Appl. Bus. Economics

Faculty of Commerce

DAYALBAGH EDUCATIONAL INSTITUTE

(DEEMED UNIVERSITY)

DAYALBAGH, AGRA

FEBUARY

2012

Indian Depository Receipt

A foreign company can access Indian securities market for raising funds through issue of

Indian Depository Receipts (IDRs). An IDR is an instrument denominated in Indian Rupees

in the form of a depository receipt created by a Domestic Depository (custodian of

securities registered with the Securities and Exchange Board of India) against the

underlying equity of issuing company to enable foreign companies to raise funds from the

Indian securities markets.

Introduction

The world has become global village due to advancement in technology in recent years

and information can be shared very rapidly across the globe. As a result, the securities

markets have become international and it has become easier to trade on international

markets. Also, a lot of countries have opened their securities markets to foreign investors

and abolished laws restricting their citizens from investing abroad. Companies that

previously had to raise capital in the domestic market can now tap foreign sources of

capital. Indian companies have listed American Depository Receipts (ADRs), Global

Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs) in

overseas markets like New York, London, Luxembourg, Singapore etc. since 90s to raise

funds from international investors. As the Indian securities markets have become deeper

and with the BSE - Sensex and NSE - Nifty giving higher returns as compared to other

indices in the world, global companies

have started showing interest in the Indian capital markets. In keeping with India's ongoing

popularity as a preferred investment destination among international investors and India's

aspirations to become a financial hub in the South Asian region, the Government of India

has consistently introduced and modified various instruments through which investments

can be made. Now a new beginning has been made. The Government of India has

introduced the concept of Indian Depository Receipts (IDRs) to facilitate listing by foreign

companies on Indian stock exchanges. A foreign company can access Indian securities

market for raising funds through issue of IDRs. A recent example is that of the global

banking giant Standard Chartered Plc. which has raised up to $1 billion (` 4,500 crore

approximately) through IDRs. Further, foreign subsidiaries of Indian companies can use

IDR route for fund raising in India

Background

An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt

created by a ‘Domestic Depository’ (custodian of securities registered with SEBI) against

the underlying equity of the issuing company in order to enable foreign companies to raise

funds from the Indian securities markets. The receipts are based on a ratio of shares

equivalent to depository receipts.

Eligible companies resident outside India are allowed to issue IDRs through a Domestic

Depository pursuant to Circular No. SEBI / CFD / DIL / DIP / 20 /2006 / 3 / 4 dated April 3,

2006 and the provisions of Issue of Capital and Disclosure Requirements (“ICDR”)

Regulations 2009 (which replaced the SEBI (Disclosure and Investor Protection)

Guidelines, 2000). In addition, the Circular and the ICDR Regulations 2009, permit persons

resident in India and outside India to purchase, possess, transfer and redeem IDRs.

Qualifying companies resident outside India issue IDRs through a Domestic Depository

subject to compliance with the Companies (Issue of Depository Receipts) Rules, 2004 and

subsequent amendments made thereto and the ICDR Regulations, 2009. 

In addition, the regulations state that in the case of raising of funds through the issuance of

IDRs by financial/banking companies having a presence in India, either through a branch or

subsidiary, the approval of the sectoral regulator(s) should be obtained before the issuance

of IDRs.  Therefore, the approval of the Reserve Bank of India (RBI) will need to be

obtained for the Standard Chartered IDR.

The SEBI guidelines permit only those companies listed in their home market for at least

three years and which have been profitable for three of the preceding five years to make

IDRissues. 

As the issuance of the IDR by SCP would be the first IDR ever undertaken, there will be a

number of challenges including the structure of the instrument, how one trades in it, what

kind of returns can be made on the instrument, and what are the risks involved.

An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form

of a depository receipt created by a Domestic Depository (custodian of securities registered

with the Securities and Exchange Board of India) against the underlying equity of issuing

company to enable foreign companies to raise funds from the Indian securities Markets.

The foreign company IDRs will deposit shares to an Indian depository. The depository

would issue receipts to investors in India against these shares. The benefit of the

underlying shares (like bonus, dividends etc) would accrue to the depository receipt holders

in India.

The Ministry of Corporate Affairs of the Government of India, in exercise of powers

available with it under section 642 read with section 605A had prescribed the Companies

(Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number

GSR 131(E) dated February 23, 2004.

Standard Chartered PLC became the first global company to file for an issue of Indian

depository receipts in India.

(a) Eligibility for issue of IDRs

(b) Procedure for making an issue of IDRs

(c) Other conditions for the issue of IDRs

(d) Registration of documents

(e) Conditions for the issue of prospectus and application

(f) Listing of Indian Depository Receipt

(g) Procedure for transfer and redemption

(h) Continuous Disclosure Requirements

(i) Distribution of corporate benefits.

These rules (“principal rules”) were operationalised by the Securities and Exchange Board

of India (SEBI)—the Indian markets regulator in 2006. Operation instructions under the

Foreign Exchange Management Act were issued by the Reserve Bank of India on July 22,

2009.The SEBI has been notifying amendments to these guidelines from time to time.

Eligibility of companies to issue IDRs

The regulations relating to the issue of IDRs is contained in Securities and Exchange Board

of India (Issue of capital and disclosure requirements) Regulations, 2009, as revised from

time to time.

According to Clause 26 in Chapter III (“Provisions as to public issue”), the following are

required of any company intending to make a public issue in India:

it has net tangible assets of at least Indian Rupee three crore in each of the

preceding three full years (of twelve months each), of which not more than fifty per

cent are held in monetary assets: Provided that if more than fifty per cent. of the net

tangible assets are held in monetary assets, the issuer has made firm commitments

to utilise such excess monetary assets in its business or project;

it has a track record of distributable profits in terms of section 205 of the Companies

Act, 1956, for at least three out of the immediately preceding five years: Provided

that extraordinary items shall not be considered for calculating distributable profits;

it has a net worth of at least INR one crore in each of the preceding three full years

(of twelve months each);

the aggregate of the proposed issue and all previous issues made in the same

financial year in terms of issue size does not exceed five times its pre-issue net

worth as per the audited balance sheet of the preceding financial year;

if it has changed its name within the last one year, at least fifty per cent. of the

revenue for the preceding one full year has been earned by it from the activity

indicated by the new name.

Further, Clause 97 in Chapter X stipulates additional requirements from a foreign company

intending to make an issue of IDRs: An issuing company making an issue of IDR shall also

satisfy the following:

the issuing company is listed in its home country;

the issuing company is not prohibited to issue securities by any regulatory body;

the issuing company has track record of compliance with securities market

regulations in its home country.

IDR issue Process

According to SEBI guidelines, IDRs will be issued to Indian residents in the same way as

domestic shares are issued. The issuer company will make a public offer in India, and

residents can bid in exactly the same format and method as they bid for Indian shares. The

issue process is exactly the same: the company will file a draft red herring prospectus

(DRHP), which will be examined by SEBI. The general body of investors will get a chance

to read and review the DRHP as it is a public document, available on the websites of SEBI

and the book running lead managers. After SEBI gives its clearance, the company sets the

issue dates and files the document with the Registrar of Companies. In the next step, after

getting the Registrar’s registration ticket, the company can go ahead with marketing the

issue. The issue will be kept open for a fixed number of days, and investors can submit

their application forms at the bidding centers. The investors will bid within the price band

and the final price will be decided post the closure of the Issue. The receipts will be allotted

to the investors in their demat account as is done for equity shares in any public issue. On

256th October 2010, SEBI notified the framework for rights issue of Indian Depository

Receipts (IDRs). Disclosure requirement for IDR rights would more or less be in line with

the reduced requirement applicable for domestic rights issue.

IDR Fungibility

The Indian depository Receipts shall not be automatically fungible into underlying equity

shares of issuing company. IDR Holders can convert IDRs into underlying equity shares

only with the prior approval of the Reserve Bank of India (RBI). Upon such exchange,

individual persons resident in India are allowed to hold the underlying shares only for the

purpose of sale within a period of 30 days from the date of conversion of the IDRs into

underlying shares. Current regulations do not provide for exchange of equity shares into

IDRs after the initial issuance i.e. reverse fungibility is not allowed.

Eligibility for investors

According to Sebi guidelines, the minimum bid amount in an IDR issue is Rs 20,000 per

applicant. Like in any public issue in India, resident Indian retail (individual) investors can

apply up to an amount of INR 2,00,000 and Non-institutional investors (also called high

networth individuals) can apply above INR 1,00,000 but up to applicable limits.

Reservations in IDR issues (clause 98, Chapter X)

According to current regulations, at least 50% of the Issue is to be allocated to qualified

Institutional Buyers (QIBs), 30% of the issue to the retail individual investors and balance

20% of the issue to non-institutional investors and employees. The ratio of non-institutional

investors and employees is at the discretion of the company to decide. The issue will fail if

the company does not get QIB investors to the extent of 50% of the issue size.

Taxation

Corporate lawyer Cyril Shroff of law firm Amarchand & Mangaldas & Suresh A. Shroff &

Co. explain the tax implications.

IDRs would also help improve the Sharpe's ratio of domestic portfolios by reducing home

bias, that is either rooted in mistakes on the part of fund managers or in capital controls,

says Professor Ajay Shah of the Indira Gandhi Institute of Developmental Research.

Government of India

Securities and Exchange Board of India

Reserve Bank of India

Tax issues: Related to IDRs

Indian investors need to consider the tax implications of investment in the IDRs. While

Section 605A of the Companies Act, 1956 (the “Companies Act”) discusses IDRs, there are

no specific provisions regarding capital gains taxation of IDRs in the Companies Act or in

the Income Tax Act, 1961.  Therefore, the general rules relating to capital gains taxation

apply and no benefits for long term holders of IDRs (ie. if the Securities Transaction Tax is

paid, there is no capital gains tax on long term holders of listed securities) are available.  It

is possible that the upcoming Direct Tax Code may clarify the issue but as of now the

capital gains tax treatment of IDRs is not favorable

An issuing company making an issue of IDR is required to satisfy the following:

(a) it should be listed in its home country1.

(b) it should not be prohibited to issue securities by any regulatory body.

(c) it should have a track record of compliance with securities market regulations in its

home country.

Conditions for issue of IDR.

An issue of IDR is subject to the following conditions:

(a) issue size should not be less than Rs.50 crore.

(b) procedure to be followed by each class of applicant for applying should be mentioned in

the prospectus;

(c) minimum application amount should be Rs.20,000;

(d) at least 50 %. of the IDR issued should be allotted to qualified institutional buyers on

proportionate basis.

(e) the balance 50 % may be allocated among the categories of non-institutional investors

and retail individual investors including employees at the discretion of the issuer and the

manner of allocation has to be disclosed in the prospectus. Allotment to investors within a

category will be on proportionate basis.

Further, atleast 30% of the IDRs issued will be allocated to retail individual investors and in

case of under-subscription in retail individual investor category, spill over to other

categories to the extent of under-subscription may be permitted.

(f) At any given time, there will be only one denomination of IDR of the issuing company.

Standard Chart IDR Issue

Standard Chartered plc is the first foreign company to have publicly elicited interest in

making an IDR issue in India. The company is already listed on the London and Hong Kong

stock Exchanges. Standard Chartered CEO Peter Sands is quoted in the Indian media as

saying the "IDR listing (is) to enhance StanChart's commitment to India."

1

Recent news reports suggest Standard Chartered PLC may be inching closer to an issue.

"We have already got advisors and we will file for the IDR issue after our (India) results are

published by March-end," said Neeraj Swaroop, Regional Chief Executive, India and South

Asia of Standard Chartered. Patrick Hosking, financial editor of the Times reports that

Standard Chartered (may) offer up to $750 million of new shares to Indians.but India’s top

financial portal reported top officials as suggesting the amount could be anywhere between

$500 million and $750 million.

Follow up to earlier reports cited, Standard Chartered Plc files DRHP to issue IDRs in India

with SEBI on March 30, 2010.

Standard Chartered Bank is set to become the first foreign company to list in India through

an Indian depository receipts (IDR) issue. StanChart expects to raise around $500-750

million (Rs 2,250-3375 crore) to grow its businesses globally.

Standard Chartered opened its IDR offering to Indian investors on May 25 2010, as

reported by BBC News. The price band for the offering is 100 (£1.47; $2.10) to 115 rupees

per IDR. The bank, which makes most of its profits in Asia, will issue 240 million IDRs

through the offer.

In an interview with NDTV India, Neeraj Swaroop, CEO - South Asia at Standard Chartered

Bank, said that the decision to list in India through an Indian depository receipts (IDR)

issue, was not about raising capital but it is about a message of commitment to India.

Standard Chartered fixed its issue price for Indian Depository Receipts at Rs 104 per unit.

At this issue price, the bank will raise Rs. 2,490 crore ($530 million) by selling 24 crore

IDRs.Every 10 IDRs represents one share of the bank.

The IDRs opened at the Bombay Stock Exchange and National Stock Exchange on June

11. Standard Chartered PLC’s Indian Depository Receipt, listed at Rs 106, and exceeded

expectations by Rs 2 or 1.92 per cent on the National Stock Exchange. For more frequently

asked questions on Indian Depository receipts refer The Economic Times & Business

Standard

Present scenario

In recent years, the securities markets have become increasingly international and it has

become easier to trade internationally around the world. A growing number of countries

have opened their stock markets to foreign investors and abolished laws restricting their

citizens from investing abroad. Companies that previously had to raise capital in the

domestic market can now tap foreign sources of capital.

Indian companies such as VSNL, MTNL, BPL, etc. have since the mid-90s listed American

Depository Receipts (ADRs) and Global Depository Receipts (GDRs) in London,

Luxembourg and New York to raise funds from international sources. The trend now is

moving the other way.

As the Indian stock markets have become deeper and with the BSE Sensex now above

17,000, global companies have become interested in tapping the Indian markets for funds.

A recent example is that of the global banking giant Standard Chartered PLC (SCP) which

is likely to raise up to $1 billion (over Rs 4,500 crore) through Indian Depository Receipts

(IDRs). 

SCP is currently in discussions with anchor investors for its IDR issue. The issue is likely to

come out in June. The bank had filed a draft red herring prospectus (DRHP) for its IDR with

capital market regulator Securities and Exchange Board of India (SEBI) in March 2010.

According to Union budget:

Standard Chartered Plc's (STAN.L) Indian shares rose as much as 20 percent, their

maximum upper limit, after the union budget on Friday proposed permitting "two-

way fungibility" for Indian depositary receipts, or IDRs.

U.K.-based Standard Chartered listed on the Indian stock exchanges in 2010 by issuing

depositary receipts in a move to strengthen its brand and presence in Asia's third-largest

economy, which was its biggest market that year.

The issue of IDRs was aimed at encouraging foreign companies to tap the Indian capital

markets, but the absence of two-way fungibility has hurt liquidity with no other company

subsequently tapping the instrument.

Making the receipts two-way fungible would allow Standard Chartered's India shareholders

to convert their shares into underlying London stocks of the bank and vice versa, to gain

from arbitrage opportunity, dealers said.

Standard Chartered India shares (STNCy.NS) were up nearly 20 percent at 93.80 rupees

after the budget proposal, while the BSE Sensex was trading lower. Finance Minister

Pranab Mukherjee said he proposed allowing IDRs to become two-way fungible with the

aim of boosting foreign participation in the Indian capital market

Standard Chartered IDR was locked at 20% upper circuit after the Finance Minister

proposed 2-way fungibility of IDR (Indian Depositary Receipt) in his Union Budget

2012-13.

GDR should be directly regulated by SEBI: Experts

There was an interesting report that was published by Crisil about Global Depository

Receipts (GDRs), bank certificates issues to Indian companies to give them access to

foreign investors. Their data indicated that 40 GDRs were issued by Indian companies in

2010 and investors have lost money in 85% of them. Four out of the five issues have given

negative returns of 35%, which means 80% of the issues are giving negative returns of a

very high magnitude of 35%. In comparison to that, the CNX 500 fell by only 7% in the

same period. Thus, it is clear that huge underperformance is coming from the GDR market.

Benefits of IDRs for Indian Investors and Rights

No resident Indian individual can hold more than $200,000 worth of foreign

securities purchased per year as per Indian foreign exchange regulations. However,

this will not be applicable for IDRs which gives Indian residents the chance to invest

in an Indian listed foreign entity.

Additional key requisites for investing in foreign securities such as a securities

trading account outside India to hold foreign securities, know your customer norms

(KYC) with foreign broker and foreign bank account to hold funds are generally too

cumbersome for most Indian investors. Such requirements are avoided in holding

IDRs.

Whatever benefits accrue to the shares, by way of dividend, rights, splits or bonuses

would be passed on to IDR holders also, to the extent permissible under Indian law. 

Benefits for International Issuers

The main benefit would be in terms of branding, besides allowing foreign companies to

access Indian capital. IDRs also allow the creation of acquisition currency and a

management incentive tool. Issuers have the option to reserve a proportion of the issue for

their employees. 

Challenges for IDRs There is the possibility of IDR issues being undersubscribed if they

are not well marketed or fail to catch the imagination of investors.  In addition, the

challenges mentioned below are certain challenges with respect to the issuance of IDRs.

Stringent eligibility norms: The stringent eligibility criteria, disclosure and corporate

governance norms (Although in the investor’s interests, they compare unfavourably with

listing norms on other tier II global exchanges such as Luxembourg, London’s Alternate

Investment Market (AIM) and Dubai. This could result in higher compliance costs for

companies seeking to tap the Indian capital markets).

Fungibility: Current regulations do not provide for the exchange of equity shares into IDRs

after the initial issuance i.e. reverse fungibility is not allowed.

Tradability of IDRs:  How one trades in the instrument/how the instruments are traded.

Returns on IDRs: What kind of returns would be made on the instrument.

Risks: What risks are involved given that the same shares would be simultaneously trading

in London and Hong Kong.

Taxation:  Lack of clarity on taxation.  It is not clear whether IDRs are exempt from capital

gains tax.

Voting Rights:  It is not entirely clear whether IDR holders will have voting rights or not –

the SEBI guidelines do not specifically mention voting rights, it leaves that to the discretion

of the issuer.

Market:  Indian financial markets are still considered volatile and contain emerging market

risk.

Conclusion

IDRs are a significant step towards the internationalization of the Indian security

markets which would also be a potential benefit for the domestic investors in India.

There remain a number of challenges as detailed above.  However, if the Standard

Chartered IDR is successful, it may herald a new trend of international companies listing

IDRs in India.  In the future, India may become a source for capital for international

issuers. Because of Indian market highly potential in future .