Indian Depository Receipts Introduction

A Depository Receipts (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company. The DR, hich is a physical certificate, allo s in!estors to hold shares in equity of other countries. ".g.. American Depository receipt (ADR), #lobal Depository Receipts (#DR). An $DR is a means for a foreign company to raise money in $ndia. An IDR is a depository receipt denominated in Indian rupees issued by a domestic depository in India. %uch like an equity share, it is an o nership pie of a company. &ince foreign companies are not allo ed to list on $ndian equity markets, $DR is a ay to o n shares of those companies 'ere foreign companies ould issue shares to an $ndian Depository hich ould in turn issue depository receipts ($DR) to in!estors in $ndia and the actual possession of shares underlying the $DRs ould be held by an (!erseas )ustodian, hich shall authori*e the $ndian Depository to issue the $DRs. These receipts can be listed in $ndia and traded in rupees. +ust like o!erseas in!estors in the ,&-listed American Depository Receipts (ADRs) of $nfosys and .ipro get receipts against o nership of shares held by an $ndian custodian, an $DR is proof of o nership of foreign company/s shares. An $ndian in!estor pays in $ndian rupees for the $DR hereas a shareholder in the issuer/s home country pays in home currency.

MEANING
An $DR or #lobal Depository Receipts is an instrument denominated in $ndian Rupees in the form of a depository receipt created by a 0Domestic Depository/ (custodian of securities registered ith &"1$) against the underlying equity of the issuing company in order to enable foreign companies to raise funds from the $ndian securities markets. The receipts are based on a ratio of shares equi!alent to depository receipts. $n!estors ill recei!e depository receipts in demateriali*ed form and each receipt ill represent a certain number of shares. &ince it is not possible to list equity shares of foreign companies in $ndia, $DRs are used as a medium to o n an interest in a foreign company and can be listed on the &tock "xchanges.

$n!estors ould ha!e an exposure to the global business of the foreign company and not only the $ndian business. As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004 ! IDR 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.

"#A$%R#& '" IDR

IDRs are depository receipts denominated in Indian Rupees issued by a

Domestic Depository in India.

IDRs represent a relative ownership interest in a fixed number of underlying

equity shares of the issuer company (known as Deposited hares!".

IDRs give the holder the opportunity to hold an awareness in equity shares in

an overseas company.

ince it is not possible to list equity shares of foreign companies in India# IDRs are used as a medium to own an interest in a foreign company and can be listed on the $ombay tock %xchange and the &ational tock %xchange in India (the tock %xchanges!". Investors would have an exposure to the global business of the foreign company and not only the Indian business. 'or example# the exposure would be to (nilever (global company" and not )ust *industan (nilever (the Indian business".

+n IDR is a mechanism that allows investors in India to invest in listed

foreign companies# including multinational companies# in Indian rupees.

+merican Depository Receipts (+DR,!" and -lobal Depository Receipts

(-DR,!" issued by Indian companies like Infosys# .ipro# I/I/I $ank and /ipla give ownership rights to foreign investors in such Indian companies. In turn IDRs give Indian investors equivalent ownership rights in foreign companies.

 IDRs will be issued to investors in India through a public issue in the same

way as equity shares are issued in an I01 in India.

Eligible investors to participate in an IDR issue

2ualified

Rule 144A requires an institution to manage at least $100 million in securities from issuers
Institutional $uyers (2I$s"

Domestic Institutional Investors 'oreign Institutional Investors and their sub3accounts registered with

%$I

excluding insurance companies and venture capital funds

&on3Institutional Investors (&Il":- /orporates# *igh &et worth Individuals and

&on3resident Indians.
Retail Individual Investors and %mployees.

(rincipal participants in the IDR "acility

The principal participants in the IDR Facility are:

Issuer Company ! The issuer company must be included outside $ndia and listed in the country of its incorporation.

Domestic Depository ! The Domestic Depository ill issue $DRs representing the underlying equity shares of the issuer company to in!estors in $ndia. The Domestic Depository must be an $ndian entity appointed by the issuer company and registered as a custodian of securities ith &"1$. The Domestic Depository acts as a trustee on behalf of the $DR holders and its rights and obligations ill be as specified in the Deposit Agreement signed bet een the issuer company and the Domestic Depository.

'verseas Custodian ! The issuer company issues equity shares to the (!erseas )ustodian ho holds them on behalf of the Domestic

Depository and on basis of hich the Domestic Depository issues $DRs in $ndia.2 $t is a foreign entity appointed by the Domestic Depository.

$he Registrar and $ransfer Agent ()R*$ Agent+) ! R3T Agent pro!ides ser!ices to the issuer company, the Domestic Depository and the $DR holders in $ndia primarily being registration and transfer of $DRs in $ndia. "xamples of ser!ices include keeping records of the $DR holders, coordinating corporate actions and handling in!estor grie!ances.

,egal frame -or. for IDR

$t is go!erned by )ompanies ($ssue of $ndian Depository Receipts) Rules, 4556 ($DR Rules) pursuant to the section 758 A of the companies Act. &"1$ issued guidelines for disclosure ith respect to $DRs and notified the model listing agreement to be entered bet een exchange and the foreign issuer specifying continuous listing requirements.
Statutes Governing IDRs are given as below:

&ection 758A of the )ompanies Act, 9:87 )ompanies ($ssue of $ndian Depository Receipts) Rules 4556 )hapter ;$A of &"1$ ($ssue of )apital and Disclosure Requirements) Regulations, 455:

The #o!ernment of $ndia has taken steps to liberali*e $ndia/s corporate and securities la s to permit foreign companies to raise capital in $ndia. As the ADR and #DR became popular globally, the $ndian #o!ernment amended the )ompanies Act, 9:87 by implementing &ection 758-A hich permits a foreign company to make a public offer of its shares to $ndian in!estors in the form of $DRs. $t gi!es the )entral #o!ernment the po er to create the rules, regulations and conditions go!erning<

The offer and issue of $DRs by a foreign company= The rules and regulations go!erning the treatment of $DRs by the Depository, )ustodian and ,nder riters= The disclosure requirements in the prospectus issued for $DRs= The manner of sale, transfer or transmission of $DRs in the stock exchanges.

#ligi/ility of companies to issue IDRs

According to Rule 4 ,an issuing company may issue $DRs only if it satisfies the follo ing conditions ! $t has had an a!erage turno!er of ,&> 855 million during the ? financial years preceding the issue. $ts pre-issue paid-up capital and free reser!es are at least ,&> 955 millions $ts pre-issue debt equity ratio is not more than 4<9. $t has been making profits for at least fi!e years preceding the issue and has been declaring di!idend of not less than 95@ each year for the said period. $t shall fulfill the eligibility criteria laid do n by &"1$ from time to time in this behalf.
Other conditions for the issue of IDRs:

$DRs shall not be redeemable into the underlying equity shares before the expiry of one year period from the date of the issue of the $DRs. The repatriation of the proceeds of issue of $DRs shall be subAect to la s for the time being in force relating to export of foreign exchange. $DRs issued by any issuing company in any financial year shall not exceed 98 per cent of its paid-up capital and free reser!es. The denomination of securities of an issuing company, the $DRs issued it shall be denominated in $ndian Rupees.

Burthermore, the &"1$ has introduced of $ssue of )apital and Disclosure Requirements Regulations,455: (CICDR RegulationsD)0After ards !arious amendments ha!e been made in the regulatory frame ork of $DRs hich renders clarity on the exchange control implication for in!estment in $DRs such as the recent )ircular dated +uly 44, 455: (CR1I CircularD) issued by the R1$, the exchange control regulator in $ndia. According to Regulation 23 of ICDR , an issuing company making an issue of $DR shall also satisfy the follo ing<

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 market regulations in its home country.

ith securities

IMPORTANCE OF IDR
$DRs are a important step to ards the internationali*ation of the $ndian security markets hich ould also be a possible benefit for the domestic in!estors in $ndia. The concept of the $DR is meant to di!ersify your holdings across regions to free from a Cregion biasD or the risk of a portfolio getting too concentrated in the home market. (ne has to study the firm/s financial condition before you buy its $DR so that one cannot be defrauded or misrepresented. &ince these $DRs are listed, bought and sold on the $ndian markets, the impact of global markets and exchange-rate risks are reduced, though not totally eliminated. Benefits to the ISSUING C !"#N$:

$t pro!ides access to a large pool of capital to the issuing capita $t gi!es brand recognition in $ndia to the issuing company $t facilitates acquisitions in $ndia Ero!ides an exit route for existing shareholders

Benefits to IN%ES& RS:

$t pro!ides portfolio management and di!ersification to the in!estors by gi!ing them a chance to buy into the stocks of reputed companies abroad. $t gi!es the facility of ease of in!estment There is no need to kno your customer norms. Fo resident $ndian indi!idual can hold more than >455,555 orth of foreign securities purchased per year as per $ndian foreign exchange regulations. 'o e!er, this ill not be applicable for $DRs hich gi!es $ndian residents the chance to in!est in an $ndian listed foreign entity.

Benefits to E!"' $EES:

Boreign companies that do not ha!e a listed subsidiary in $ndia can gi!e employee stock options ("&(Es) to the employees of their $ndian subsidiaries through the $DR route. This ill enable the local employees to participate in the parent companies/ success.

Benefits to REGU'#& R: $DRs ill lead to more liquid capital markets and a continuous impro!ement in regulatory en!ironment, thereby increasing transactional re!enues for the regulator. Benefits to ( REIGN C !"#NIES:
+ company which has significant business in India can increase its value

through IDRs by breaking down market segmentations# reaching trapped pools of liquidity# achieving global benchmark valuation# accessing

international shareholder base and impro!ing its brand/s presence through global !isibility. Also, differences in tax structure, regulatory restrictions and informational constraints bet een the countries may also help in creating economic benefits. &imilarly, the foreign entities of $ndian companies may find it easier to raise money through $DRs for their business requirements abroad.. Benefits for IN&ERN#&I N#' ISSUERS: The main benefit ould be in terms of branding, besides allo ing foreign companies to access $ndian capital. $DRs also allo the creation of acquisition currency and a management incenti!e tool. $ssuers ha!e the option to reser!e a proportion of the issue for their employees.

Benefits of IDR can be su))ari*e+ as: $ndian in!estors gets chance to in!est in foreign entity "asier Access to $DR/s than shares 1enefits of shares accrue to $DR/s also $nternational issuers 1randing %anagement Eool Reser!e a proportion for employees

)ompanies in $ndia ha!e reached out to the global equity markets in the past by issuing ADR and #DR .$t no appears that the it is high time for a role re!ersal. the $ndian Depository Receipt (C$DRD) mechanism offers to o!erseas companies seeking to raise capital from the $ndian stock markets ..ith the introduction of the $DR regime, not only it has ad!anced an additional a!enue for foreign companies to raise capital in $ndia, but also, an additional flexible route for $ndian in!estors to in!est in global corporations. &o e can say that $DRs are a important step to ards the globali*ation of the $ndian security markets hich ould also be benefit for the in!estors in $ndia.

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