Indian Depository Receipts (IDR)

What is Depository Receipts? 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).

What is IDR? An 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 in order to enable foreign companies to raise funds from the Indian markets.

Introduction in India 1 st step:- Section 605A of the companies act, nd Step:- Companies (Issue of Indian Depository Receipts) Rules, rd Step:- Chapter VIA of the SEBI (Disclosure & Investor Protection) Guidelines.

Why do you need an IDR? Reasons:- Diversify Holding across regions Risk of portfolio getting concentrated in the home market. Exchange rate risks are reduced Acquire shares of global companies Allow global companies to access funds at cheaper costs.

Who can issue IDR?. Eligibility criteria for issue of IDRs. Paid Up Capital and Free Reserves $ 100 m Average turnover $ 500 m in 3 financial years Profits and dividends of not less than 10% for 5 years Pre issue debt equity ratio – 2:1 Issue should not exceed 15% of paid up capital + free reserves in a particular year. Continued……

Would not be redeemable into underlying equity shares before one year from date of issue Must be listed in its home country. Must not be prohibited by any regulatory body to issue securities Must have a good track record with compliance with securities market regulations. Must comply with any additional criteria set by SEBI Continued…

How it will work? Draft Prospectus is filed with SEBI Issue fee is paid Issuing Company will obtain necessary permission & exemption from the country of its incorporation & appoint an overseas custodian bank for issue Deliver the underlying shares to overseas bank Trading & settlement will be similar to those of Indian shares

Who can invest in IDR? Indian Companies Qualified Institutional Buyers NRI’s and FII’s with permission of the Reserve Bank of India

Eligibility for investing in IDR The Minimum issue size is Rs. 50 crore 90% of the issue must be subscribed Automatic Fungibility is not Permitted

Benefits of IDR. Indian investors gets chance to invest in foreign entity Easier Access to IDR’s than shares Benefits of shares accrue to IDR’s also International issuers Branding Management Pool Reserve a proportion for employees

Limitations of IDR Stringent eligibility norms Fungibility Tradability of IDR’s Returns on IDR’s Risks Taxation Voting Rights Market

How are IDR’s taxed? Not subject STT like shares Not subject to dividend distribution tax General rule regarding capital gain taxation shall apply No benefits for long term holders of IDR’s are available Direct tax code may clarify the issue

DISCLOSURES – Contents of prospectus – Risk factors and management perception – Market price information in home country – Dividend Policy – History of Exchange Rates in home country – Foreign investment and Exchange Controls in Home Country – Capital structure – Financial information

Conclusion

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