Indian depository receipts: An attractive proposition?

Indian depository receipts (IDRs) are similar to American depository receipts (ADRs) and Global depository receipts (GDRs) with the exception that IDRs are issued by companies incorporated outside India and listed and traded on Indian stock exchanges.

The issue, listing and trading of IDRs is governed by Indian regulations, namely, the Companies (Issue of Indian Depository Receipts) Rules,2004, which were amended in 2007, together with the SEBI (Disclosure and Investor Protection) Guidelines,2000. IDRs give foreign companies the ability to raise capital from India and have their shares (indirectly)traded on Indian stock exchanges irrespective of whether they have established a place of business in India.

No takers yet

The issuance of IDRs involves issuing the underlying equity shares of the foreign company to an overseas custodian bank. The overseas custodian thereafter authorizes the Indian depository to issue IDRs to investors. The IDRs are denominated in Indian rupees and are listed and traded on Indian stock exchanges.

However, there are certain restrictions on the conversion of IDRs into underlying equity shares. The IDRsare subject to a lock-in period of one year from the date of their issue, during which the IDRs cannot be converted into underlying equity shares.

This provision is considered by several industry participants to be a major deterrent for investments in IDRs.

Although the mechanism for issuing and listing IDRs has been laid down for a few years now, there have been no instances of foreign companies taking this route.

Requirements eased

The IDR rules of 2004 were amended in 2007 upon requests to make their provisions more attractive for foreign companies. The rules of 2004 prescribed difficult eligibility norms, so to rationalize this, amendments made in 2007 eventually led to a decrease in the requirement of pre-issue paid-up capital and free reserves of the overseas issuing company from US$ 100 million to US$50 million.

Further, the average turnover requirement of US$500 million over the previous three years was replaced with a minimum market capitalization of US$100 million. These conditions are similar to those in the UK and the US for the issue of depository receipts.

The requirement of having a pre issue debt-equity ratio of 2:1 has also been done away with as the legislature seems to recognize that debt-equity ratios are not necessarily indicative of the size or quality of a company.

The regulator has also taken cognizance of the fact that several companies do not have a policy of declaring dividends, as a result of which, the minimum 10% dividend payment requirement for the issuing company has been substituted with the condition of having a track record of distributable profits in terms of section205 of the Companies Act, for at least three out of the immediately preceding five years.

The earlier ceiling on the issue size of IDRs to a maximum of 15% of paid up capital and free reserves has been increased to 25% of the post-issue equity shares of the issuing company. Further, SEBI’s approval process has been made time-bound, which lends certainty to the duration of the process.

In addition, the requirement to audit quarterly financial results and the need to publish these in local newspapers has also been done away with. Local exchanges have been granted the power to determine disclosure requirements in this regard.

Listings considered

Although regulations have been amended to attract foreign companies to issue IDRs, key provisions such as the one year lock-in are unchanged. It remains to be seen whether the changes suggested in 2007 are attractive enough for foreign companies to issue IDRs and in turn, for investors to purchase IDRs.

Newspapers have, however, reported that multinationals like Standard Chartered and ArcelorMittal appear to be considering listings in India using the IDR route.

The success of the changes proposed by the 2007 amendment to the IDR rules will be determined by the number of IDR issuances that will take place in the near future. If the IDR route is still not found to be appealing enough, the government may have to go back to the legislature with amendments that make the rules viable from a commercial perspective.

Amit Tambe is a partner and Namrata Sinha is an associate at Trilegal in Mumbai. Trilegal is a full service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 80 lawyers, some with experience at law firms in the US, the UK and Japan.