Securities and Exchange Board of India (SEBI) attempt to this Indian Depository Receipt (IDR) partial fungibility is in light of the former finance minister Pranab Mukherjee, Union Budget proposal for Financial Year 2013 for improving the attractiveness of IDRs as an instrument for attract foreign entities to list their IDRs on domestic bourses and to prescribe a framework for two-way fungibility of IDRs. Investor can convert up to 25 per cent of their IDRs into underlying of a company into overseas listed equity shares in a financial year.1

The fungibility issue is seen as one of the major factors restraining foreign entities from listing their IDRs. Currently, Standard Chartered Plc, which is listed on London Stock Exchange and Hong Kong Stock Exchange, is the only entity that listed its IDR in India. The global banking major came out with its IDR issue in May 2010 and was listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in June 2010.

Effect

The two-way fungibility would enable Indian shareholders to convert their depository receipts into equity shares of the issuer company and vice versa.

Background

Investment in IDR is an interesting opportunity for the Indian investors who are looking for investing their funds in foreign equity. IDR are meant for foreign companies looking to raise capital in India. IDR means any instrument in the form of a depository receipt created by Domestic Depository in India against the underlying equity shares of issuing company which is located outside India. Thus Indian IDR holders would thus indirectly own the equity shares of overseas issuer company. IDR are to listed and denominated in Indian currency. An issuing company cannot raise funds in India by issuing IDR unless it has obtained prior permission from SEBI.

Regulatory Framework

The relevant legal/regulatory provisions of fungibility of IDRs are Rule 10 of Companies (Issue of Indian Depository Receipts) Rules, 2004, RBI’s circular dated July 22, 2009; Securities Contract Regulation Act, 1956; Foreign Exchange Management Act, 1999 and Regulation 100 of Chapter X of SEBI (ICDR) Regulations, 2009.

IDR [Indian Depository Receipt]

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 Markets2.

Eligibility for issue of IDRs

An issuing company may issue IDRs only if it satisfies the following conditions:-

  1. Its pre-issue paid-up capital and free reserves are at least US$ 100 millions and it has had an average turnover of US$ 500 million during the 3 financial years preceding the issue.
  2. It has been making profits for at least five years preceding the issue and has been declaring dividend of not less than 10% each year for the said period.
  3. Its pre-issue debt equity ratio is not more than 2:1.
  4. It shall fulfill the eligibility criteria laid down by SEBI from time to time in this behalf.

Requirement for investing in IDRs

Following are the requirements which are to be met before investing in IDRs:

  1. IDRs can be purchased by any person who is resident in India as defined under FEMA.
  2. Minimum application amount in an IDR issue shall be Rs. 20,000.
  3. Investments by Indian companies in IDRs shall not exceed the investment limits, if any, prescribed for them under applicable laws
  4. In every issue of IDR—
    1. At least 50% of the IDRs issued shall be subscribed to by QIBs[Qualified Institutional; Buyers];
    2. The balance 50% shall be available for subscription by non‐institutional.

Conclusion

To improve the attractiveness and long-term sustainability of IDR instruments a frame work for two-way fungibility of IDRs will be issued separately so that other foreign companies other than Standard Chartered Plc shall issue fresh IDRs.

Accordingly, suitable instructions for modifying the existing legal framework governing IDRs, in order to implement the decision to allow redemption of IDRs into underlying equity shares and re-conversion of equity shares of a foreign issuer (which has already listed their IDRs) into IDRs, will be issued separately.