All about Indian Depository Receipts

What are Indian Depository Receipts (IDRs)?

IDRs are like American Depository Receipts or Global Depository Receipts, except that the issuer is a foreign company raising funds from the Indian market. IDRs are rupee-denominated and created by a domestic depository against the underlying equity shares of a foreign company.

Who can issue IDRs?

Any company listed in the country of incorporation can issue IDRs. Besides, the issuer needs pre-issue capital and free reserves of at least $50 million (around Rs 225 crore) and should have a market capitalisation of $100 million (Rs 450 crore) or more during the last three years. The company should have also made profits in three of the preceding five years.

How will it work?

The process is similar to an initial public offering where a draft prospectus is filed with the Securities and Exchange Board of India.

The minimum issue size is $500 million (around Rs 2,250 crore). Shares underlying IDRs will be deposited with an overseas custodian who will hold shares on behalf of a domestic depository. IDRs will be issued through a public offer in India in the demat form and will be listed on Indian exchanges. Trading and settlement will be similar to those of Indian shares.

At least half of the investors have to be qualified institutional investors with 30 per cent of the issue size reserved for small investors. Recently, the regulators allowed a single institutional investor to acquire up to 15 per cent of the issue size. In addition, banks have also been allowed to participate.

For a retail investor, the annual $200,000 ceiling (Rs 90 lakh) on overseas remittances, which can be used to buy shares, will not apply to IDRs, as the issues are rupee-denominated.

Will Indian investors get equal rights as shareholders?

Except attending annual general meetings and voting on resolutions, other rights are available.

Are there tax issues?

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.

What are the benefits for the issuing company?

The main benefit is in terms of branding, besides allowing foreign companies to access Indian capital. It is also seen as the platform for creation of acquisition currency and a management talent pool. Issuers have the option to reserve a proportion of the issue for employees.