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, which is a physical
certificate, allows investors to hold shares in equity of other countries.

E.g.. American Depository receipt (ADR), Global Depository Receipts (GDR).

An IDR is a means for a foreign company to raise money in India. An IDR is a

depository receipt denominated in Indian rupees issued by a domestic depository in
India. Much like an equity share, it is an ownership pie of a company. Since foreign
companies are not allowed to list on Indian equity markets, IDR is a way to own shares
of those companies Here foreign companies would issue shares to an Indian Depository
which would in turn issue depository receipts (IDR) to investors in India and the actual
possession of shares underlying the IDRs would be held by an Overseas Custodian,
which shall authorize the Indian Depository to issue the IDRs.

These receipts can be listed in India and traded in rupees. Just like overseas investors
in the US-listed American Depository Receipts (ADRs) of Infosys and Wipro get receipts
against ownership of shares held by an Indian custodian, an IDR is proof of ownership
of foreign companys shares. An Indian investor pays in Indian rupees for the IDR
whereas a shareholder in the issuers home country pays in home currency.

MEANING
An IDR or Global Depository Receipts 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.

Investors will receive depository receipts in dematerialized form and each receipt will
represent a certain number of shares. Since 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 Stock Exchanges. Investors would have an exposure
to the global business of the foreign company and not only the Indian 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.

FEATURES OF IDR
IDRs are depository receipts denominated in Indian Rupees issued by a
Domestic Depository in India.

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

equity shares of the issuer company (known as Deposited Shares).

IDRs give the holder the opportunity to hold an interest in equity shares in an
overseas company.

Since 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 Bombay Stock Exchange and the National Stock Exchange in India (the
Stock Exchanges). Investors would have an exposure to the global business of
the foreign company and not only the Indian business. For example, the
exposure would be to Unilever (global company) and not just Hindustan Unilever
(the Indian business).

An IDR is a mechanism that allows investors in India to invest in listed foreign

companies, including multinational companies, in Indian rupees.

American Depository Receipts (ADR5) and Global Depository Receipts

(GDR5) issued by Indian companies like Infosys, Wipro, ICICI Bank and Cipla
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 IPO in India.

Eligible investors to participate in an IDR issue

Qualified Institutional Buyers (QIBs)
Domestic Institutional Investors
Foreign Institutional Investors and their sub-accounts registered with SEBI
excluding insurance companies and venture capital funds
 Non-Institutional Investors (NIl):- Corporates, High Net worth Individuals and
Non-resident Indians.
Retail Individual Investors and Employees.

Principal participants in the IDR Facility

The principal participants in the IDR Facility are:-

Issuer Company:- The issuer company must be incorporated outside India

and listed in the country of its incorporation.

Domestic Depository:- The Domestic Depository will issue IDRs

representing the underlying equity shares of the issuer company to investors in
India. The Domestic Depository must be an Indian entity appointed by the issuer
company and registered as a custodian of securities with SEBI. The Domestic
Depository acts as a trustee on behalf of the IDR holders and its rights and
obligations will be as specified in the Deposit Agreement signed between the
issuer company and the Domestic Depository.

Overseas Custodian:- The issuer company issues equity shares to the

Overseas Custodian who holds them on behalf of the Domestic Depository and
on basis of which the Domestic Depository issues IDRs in India. It is a foreign
entity appointed by the Domestic Depository.

The Registrar and Transfer Agent (R&T Agent):- R&T Agent

provides services to the issuer company, the Domestic Depository and the IDR
holders in India primarily being registration and transfer of IDRs in India.
Examples of services include keeping records of the IDR holders, coordinating
corporate actions and handling investor grievances.

Legal frame work for IDR

It is governed by Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR
Rules) pursuant to the section 605 A of the companies Act. SEBI issued guidelines for
disclosure with respect to IDRs and notified the model listing agreement to be entered
between exchange and the foreign issuer specifying continuous listing requirements.

Statutes Governing IDRs are given as below:

Section 605A of the Companies Act, 1956

 Companies (Issue of Indian Depository Receipts) Rules 2004

Chapter VIA of SEBI (Issue of Capital and Disclosure Requirements)

Regulations, 2009

The Government of India has taken steps to liberalize Indias corporate and securities
laws to permit foreign companies to raise capital in India. As the ADR and GDR became
popular globally, the Indian Government amended the Companies Act, 1956 by
implementing Section 605-A which permits a foreign company to make a public offer of
its shares to Indian investors in the form of IDRs. It gives the Central Government the
power to create the rules, regulations and conditions governing:

The offer and issue of IDRs by a foreign company;

The rules and regulations governing the treatment of IDRs by the Depository,
Custodian and Underwriters;

The disclosure requirements in the prospectus issued for IDRs;

The manner of sale, transfer or transmission of IDRs in the stock exchanges.

Eligibility of companies to issue IDRs

According to Rule 4 ,an issuing company may issue IDRs only if it satisfies the following
conditions:-

It has had an average turnover of US$ 500 million during the 3 financial years
preceding the issue.

Its pre-issue paid-up capital and free reserves are at least US$ 100 millions

Its pre-issue debt equity ratio is not more than 2:1.

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.

It shall fulfill the eligibility criteria laid down by SEBI from time to time in this
behalf.

Other conditions for the issue of IDRs:-

IDRs shall not be redeemable into the underlying equity shares before the expiry
of one year period from the date of the issue of the IDRs.
 The repatriation of the proceeds of issue of IDRs shall be subject to laws for the
time being in force relating to export of foreign exchange.

IDRs issued by any issuing company in any financial year shall not exceed 15
per cent of its paid-up capital and free reserves.

The denomination of securities of an issuing company, the IDRs issued it shall

be denominated in Indian Rupees.

Furthermore, the SEBI has introduced of Issue of Capital and Disclosure Requirements
Regulations,2009 (ICDR Regulations).Afterwards various amendments have been made in
the regulatory framework of IDRs which renders clarity on the exchange control implication for
investment in IDRs such as the recent Circular dated July 22, 2009 (RBI Circular) issued by
the RBI, the exchange control regulator in India.

According to Regulation 97 of ICDR , 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

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. 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 as follows:-

A Draft Red Herring Prospectus (DRHP) would be prepared by the Company

and the Book Running Lead Managers (BRLM5) which would be examined by
SEBI. The same would be available on the websites of SEBI and the BRLMs.
After clearance from SEBI, issue dates will be announced and a Red Herring
Prospectus (RHP) will be submitted to Registrar of Companies (R0C).
The price band will be announced prior to the issue opening date and investors
can apply for IDRs by completing an application form during the issue period.
 Once the issue price has been finalized, IDRs will be credited into the
dematerialized accounts of the IDR holders.
Once the issuer company gets listing and trading approval, the IDRs will trade on
the Stock Exchanges as in the case of an IPO in India.

Reservations in IDR issues

According to current regulations regarding the allocation is as follows:-
Qualified Institutional Buyers (QIBs): Minimum 50% of the issue to be allotted.
Institutional investors above Rs 1, 00,000 up to the issue size.

Retail Investors: 30% of the issue to be offered to retail individual investors.

Minimum limit of bids is Rs 20,000 and maximum of Rs 100,000.

Non-institutional investors (NIl) & Employees: NIl have to invest above Rs

100,000 up to the issue size. Balance of 20% to be apportioned between NIls
and Employees at the discretion of the issuer company.

Under-subscription in any of the categories other than the QIB category can be
adjusted against oversubscription in other investor categories.

No IDR holder can individually own more than 5% of the total IDRs issued except
for QIBs which can hold up to 15% of the IDR issued.

Rights of an IDR holder

The rights and obligations of the IDR holders will be specified in the Deposit Agreement and
will be summarized in the DRHP. An IDR holder will be entitled to rights on an equitable basis
vis--vis the rights of shareholders of the issuer company in its home country.IDR holders will
have rights of legal recourse against the issuer company as well as the Domestic Depository as
provided under the Deposit Agreement.
Some of the rights of the IDR holders include:-
Voting rights.
Entitlement to bonus issues.
Entitlement to dividends.
Participation in rights issues.
Participation in sub-divisions and consolidations of underlying equity shares.
Participation in other distributions and corporate actions.
These rights will be exercised through the Domestic Depository and the Overseas
Custodian if they are practicable and legally feasible. In case any distribution of equity shares
is not possible to investors in India, either due to practical or legal issues, the Domestic
 Depository will generally sell the equity shares and pay any cash (after certain fees and
expenses) to the IDR holders.

Process to get distributions by an IDR holder

The Domestic Depository will notify the IDR holders of such distributions. The distributions will
be available to the IDR holders as of a record date which will be fixed by the Domestic
Depository .The process is similar to distribution or corporate action by any Indian company in
India: In the case of a bonus issue, the proportionate IDRs will be credited into the
dematerialized account of the IDR holders. In the case of a cash dividend, the dividend will
either be credited to a bank account or warrants would be dispatched to IDR holders. In the
case of a rights issue, the Domestic Depository will make application forms available to the IDR
holders; the IDR holders can apply for their proportionate rights. Once the Overseas Custodian
gets the underlying equity shares, the Domestic Depository will credit the IDRs to the
dematerialized account of the relevant IDR holders.
In case it is not practical or legally possible to distribute underlying equity shares, such
underlying equity shares or interest in such underlying equity shares will generally be sold by the
Domestic Depository and any resulting cash (after certain fees and expenses) would be paid to
the IDR holders. If there are different regulatory requirements in India and the home country of
the issuer company, especially in terms of rights issues, it may not be possible to make rights
issues available to IDR holders. In such a case rights entitlements would generally be sold on the
home country market and any resulting cash (after certain fees and expenses) would be paid to
the IDR holders.

Tax treatment on 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 (i e. if the Securities
Transaction Tax is paid, there is no capital gains tax on long term holders of listed
securities) are available.

Secondary trading of IDRs is not subject to Securities Transaction Tax (STT)

and hence capital gains tax will be payable on any trading profits.

Dividend distribution tax is not payable by the issuer company and hence such
tax will be payable by the IDR holders.

The Direct Taxes Code (DTC) as currently drafted does not distinguish between
capital gains tax treatment of listed shares and other assets such as IDRs, so, if
 the DTC is implemented in its present form, there will be parity of treatment. The
DTC also makes no distinction between long term and short term capital gains.
As the DTC has not yet been implemented, the provisions summarized above
could change.

Can IDRs be converted?

IDR holders will have to wait for an year after issue before they can demand that their
IDRs be converted into the underlying shares and with the prior approval of the RBI

However this conversion is subject to certain conditions:

a) IDR Holders can convert IDRs into underlying equity shares only with the prior
approval of the RBI.

b) Upon such exchange, individual investors 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

c) Current regulations do not provide for exchange of equity shares into IDRs after
the initial issuance i.e. reverse fungibility is not allowed.

IMPORTANCE OF IDR
IDRs are a important step towards the internationalization of the Indian security markets
which would also be a possible benefit for the domestic investors in India. The concept
of the IDR is meant to diversify your holdings across regions to free from a region bias
or the risk of a portfolio getting too concentrated in the home market. One has to
study the firms financial condition before you buy its IDR so that one cannot be
defrauded or misrepresented. Since these IDRs are listed, bought and sold on the
Indian markets, the impact of global markets and exchange-rate risks are reduced,
though not totally eliminated.

Benefits to the ISSUING COMPANY:

It provides access to a large pool of capital to the issuing capita

It gives brand recognition in India to the issuing company

It facilitates acquisitions in India

Provides an exit route for existing shareholders

Benefits to INVESTORS:

It provides portfolio management and diversification to the investors by giving

them a chance to buy into the stocks of reputed companies abroad.

It gives the facility of ease of investment

There is no need to know your customer norms.

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.

Benefits to EMPLOYEES:

Foreign companies that do not have a listed subsidiary in India can give
employee stock options (ESOPs) to the employees of their Indian subsidiaries
through the IDR route. This will enable the local employees to participate in the
parent companies success.

Benefits to REGULATOR:

IDRs will lead to more liquid capital markets and a continuous improvement in
regulatory environment, thereby increasing transactional revenues for the
regulator.

Benefits to FOREIGN COMPANIES:

 A 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 improving its brands presence through global visibility.
Also, differences in tax structure, regulatory restrictions and informational
constraints between the countries may also help in creating economic benefits.
Similarly, the foreign entities of Indian companies may find it easier to raise
money through IDRs for their business requirements abroad..
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.

Benefits of IDR can be summarized as:

Indian investors gets chance to invest in foreign entity

Easier Access to IDRs than shares

Benefits of shares accrue to IDRs also

International issuers

Branding

Management Pool

Reserve a proportion for employees

Companies in India have reached out to the global equity markets in the past by
issuing ADR and GDR .It now appears that the it is high time for a role reversal. the
Indian Depository Receipt (IDR) mechanism offers to overseas companies seeking to
raise capital from the Indian stock markets .With the introduction of the IDR regime, not
only it has advanced an additional avenue for foreign companies to raise capital in India,
but also, an additional flexible route for Indian investors to invest in global corporations.
So we can say that IDRs are a important step towards the globalization of the Indian
security markets which would also be benefit for the investors in India.
 Case Study on the IDR of
Standard Chartered Plc
Standard Chartered PLC is an International bank listed on the London and Hong Kong
Stock Exchanges. It has operated for over 150 years in some of the worlds most
dynamic markets in Asia, Africa and the Middle East, with over 75,000 employees in
more than 70 countries. In India, it operates one of the countrys largest foreign bank
branch networks with more than 90 branches in 37 cities and about 17,500 employees.

Standard Chartered Plc issue Indian depository receipt (IDR) the first by any
multinational entity on 25 May 2010, to raise $500-750million. There was an issue of
240 million IDRs where every 10 IDRs represented one share of StanChart. The stock
price of the bank on the London Stock Exchange (LSE) was the reference rate for fixing
the price band of the IDRs. This was done to boost the companys market visibility and
brand perception in India and to give Indian investors an opportunity to invest in the
Company and participate in its growth.

Standard Chartered CEO Peter Sands is quoted in the Indian media as saying the IDR
listing is to enhance StanCharts commitment to India.The StanChart IDR issue was
opened for subscription on May 25, 2010 until May 28, 2010. Though the price band of
the IDR was between INR 100 and INR 115, most of the bids were between INR 100
and INR 104. The bank issued 240 million IDRs including the anchor investors share of
36,000,000 IDRs . The total number of bids received at the NSE and the BSE were
312,025,000 and 137,680,000 IDRs, respectively, while the total number of bids
received at cut-off price was 15,033,200. At the BSE, the IDR issue of StanChart was
subscribed 2.2 times, while at the NSE, the issue was subscribed 1.53 times.

The Company has publicly filed a Red Herring Prospectus with the Registrar of
Companies in New Delhi. The offer document contains comprehensive information
about Standard Chartered PLC and the public offering as well as final material
disclosures on the IDR instrument, for Indian retail, non-institutional and qualified
institutional investors.

In June 2010, Standard Chartered Bank became the first and currently the only one
such institution to raise over USD 500mn from the Indian capital markets. This
transaction has more than one significance. First it sends a very strong signal to other
financial services institutions of the importance of the Indian market. Second it proves to
the world that there is tremendous liquidity and depth in the Indian capital markets to
absorb large issues. This is further exemplified by the activities of the year. Since July
2010, the capital markets have delivered more than USD 5billion through 24 IPOs.

The largest amongst the lot Coal India, raised more than USD 3.5bn which is to-
date the largest IPO in the countrys history. The third major and perhaps arguably the
most important reason why an international company would raise capital from the Indian
markets is to strengthen their brand equity across the board. The extremely public and
retail nature of the IPOs in India means that the companys brand will get splashed
across the nation, and most likely to a subscriber group that they may never be able to
reach out in the normal course of marketing.

Other benefits include better relations with the regulators, gaining a currency through
which a corporate may make acquisitions and/or reward its stakeholders. But the IDR
as a product is also very much in its early days and will evolve in the coming years as
more and more issuers queue up. There are still a number of areas that need to be
improved which the regulators may have missed altogether.

For Standard Chartered as an institution using this product is very unique given its
historic linkage with the markets and more importantly the fact that close to a quarter of
its profits come from the Indian market alone. But for others that may not yet have the
same presence as the Bank, they could find the sailing full of hurdles.

Currently only those companies listed on the main board of London Stock Exchange or
similar exchanges that are regulated by an independent regulator such as the Financial
Services Authority are allowed to issue an IDR. This means that the companies on
junior markets such as AiM may have to wait a bit longer before the Indian regulators
allow them. But there is a case that these companies could argue in front of the Indian
regulators given the ongoing compliance requirements for IDRs are very much in line
with what the home country regulator will want from them.

Another limitation of the IDR product, and one that is the most counter-intuitive, is that
the issuer must take the proceeds out of India. Whilst most issuers would use the IDR
as a way to further strengthen their franchise in India, the Indian regulators feel that the
proceeds must be for used for corporate purposes. If the corporate is committed to
growing their business in India then they must as a normal course plan to invest using
established FDI channels.

But both of these issues are not insurmountable and the experience of all the advisors
that worked on the Standard Chartered transaction is that the Indian regulators will be
genuinely happy to discuss with prospective issuers how to overcome these limitations
or barriers.
 The Indian capital markets stakeholders must congratulate themselves for successfully
bringing this product to the market as they join the elite club of Depository Receipts. It is
a forceful demonstration of the maturity of the Indian regulatory framework and takes
the country a step towards capital account convertibility.

Problems faced by Standard Chartered

during the issue
Problems faced by Standard Chartered during the issue are as given below:

The pricing and price movement in IDRs was directly linked to the share price of
StanChart in the London Stock Exchange; this led to apprehension because any
slowdown in the European economy would in turn affect the valuation of the
bank, which would hamper its price movement in IDRs.

The two risks faced by StanChart were:

Interest rate risk due to short term borrowing to fund long term assets; and

Currency risk due to the strengthening of the US Dollar vis--vis local

currencies in the countries of its presence.

Tax issues:-There is also problem related tax issue as to how it will be taxed.

Post-issue Concerns
Redemption: The StanChart IDR fell by almost 20% after the issue of SEBIs
circular (CIR/CFD/DIL/3/2011) on June 3, 2011 that disallowed redemption after
one year except in cases where the shares were illiquid.

The bulk of the investor base for StanChart was composed of Foreign
Institutional Investors (FIIs). The only reason for FIIs to invest in this IDR was that
they could be obtained at lower rates in India compared to London. The purpose
of the IDR was to broaden the investor base in India. However, this objective was
clearly not achieved because FIIs were allowed to invest in the issue.
 Limitations of IDR
In spite of all the benefits, IDRs have not really taken off. Some of the reasons for this
lack of interest in IDRs are:

Stringent eligibility norms:

The stringent eligibility criteria, disclosure and corporate governance norms,
though in the investors interests, compare unfavorably with listing norms on
other tier II global exchanges such as Luxembourg, Londons Alternate
Investment Market and Dubai. This could result in higher compliance costs for
mid-sized companies seeking to tap the Indian capital markets.

No automatic fungibility:
The GDR/ADR holders enjoy two-way fungibility option while investors in IDRs
can exercise the option only after one year. Even after one year, retail investors
are required to sell off the shares obtained by redemption in the foreign stock
exchange where they are listed.

No Interest & exchange rate arbitrage opportunity:

Two-way fungibility enables an investor to benefit from any arbitrage
opportunities arising due to exchange rate fluctuations or quotation differences
on the two stock exchanges. An IDR investor is denied of this opportunity. Also,
the issuer is required to immediately repatriate the rupee funds through IDR
proceeds back to the home country. By not allowing them to park their rupee
funds in India, they cannot take advantage of any interest arbitrage opportunity.
Also, given the fact that rupee is not a floating currency, it would entail
conversion into dollars or other hard currency and then being repatriated. This
would exert pressure on the rupee.

Lack of clarity on taxation issue:

IDRs are not subject to securities transaction tax. Besides, dividends received by
IDR holders will not be subject to dividend distribution tax. But, at present,
exemption from long-term capital gains tax and concessional short-term capital
gains are not available for secondary sales on the stock exchanges. However,
the issue is expected to be resolved with the implementation of the Direct Tax Code.
Other constraints:

Insurance companies are not allowed to invest in IDRs.

Lack of advertising of IDRs:- Any new product needs aggressive

advertising to make it popular, which was overlooked by the Indian
exchanges. The IDRs were not marketed aggressively by Indian
exchanges. Depositary receipts like ADR , GDR have offices in various
 countries, and these offices market their instruments. Implementing these
two changes will make the IDR a more popular instrument.

Conclusion
To ensure the success of IDRs, India needs to first focus on a smaller region,
and then move to the global market depending on its initial success. There are
various obstacles prevent the issue of IDRs by foreign companies in India, such as
tax issues, strict eligibility criteria. Indian laws relating to capital markets are highly
comprehensive so this also one of the problem faced by the IDR.

In order to attain the status of a favorable issuer destination, capital markets,

especially emerging markets such as India, need to adopt issuer-friendly regulations,
without compromising on investor protection. Strict regulations are required to a
certain extent, in order to regulate the market. Though, this may lead to a decrease
in the confidence of the issuers. So, capital markets should adopt a middle path
wherein regulations are strong enough to ensure investor protection and do not
deter issuer participation .
 REFERENCES

www.google.com
www.sebi.gov.in
www.wikipedia.org
www.investopedia.com