Recently we saw Standard Chartered Bank becoming the first foreign company to issue IDRs in India to raise capital. The issue was subscribed 2.2 times and will be listed shortly on Indian bourses. I am sure many of us would have doubts regarding IDRs. Following are some of the basic facts about IDRs which investors should be aware-
Q:What is an Indian Depository Receipt (IDR)?
A:An IDR is a mechanism that allows investors in India to invest in listed foreign companies, including multinational companies, in Indian rupees. IDRs give the holder the opportunity to hold an interest in equity shares in an overseas company. IDRs are denominated in Indian Rupees and issued by a Domestic Depository in India. They can be listed on any Indian stock exchange. In other words, what ADRs/GDRs are for investors abroad with respect to Indian companies, IDRs are for Indian investors with respect to foreign companies.
Q:What does an IDR represent?
A:Each IDR represents proportional ownership interest in a fixed number of underlying equity shares of the issuer company. For example, in the recently concluded IDR issue of Standard Chartered Bank, 10 IDRs represent 1 equity share of the the Bank.
Q:What are the parties involved in IDR issue and what are their roles?
A:The principal parties in the IDR issue are the issuer company, the Overseas Custodian, the Domestic Depository and the Registrar & Transfer Agent.
Issuer Company is the foreign company which wants to raise money through issue of IDRs. It must be listed in its country of incorporation.
Domestic Depository is an Indian entity appointed by the issuer company and registered as a custodian of securities with SEBI. Domestic Depository issues IDRs representing underlying equity shares of the issuer company to investors in India and acts as a trustee on behalf of the IDR holders. Its rights and obligations are specified in the Deposit Agreement signed between the issuer company and the Domestic Depository.
Overseas custodian is the holder of equity shares on behalf of the Domestic depository and is appointed by Domestic Depository.
Registrar and Transfer 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.
Q:Who is eligible to subscribe to IDRs and in what proportion is an IDR issue allocated between different categories of investors?
A:Similar to an IPO in India, Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NII) like Corporate, high networth Individuals (HNIs) and Non-resident Indians, retail Individual Investors and employees can participate in IDR issue.
Minimum 50% of the issue should be allotted to QIBs whereas 30% of the issue should be offered to retail individual investors. Balance 20% to be apportioned between NIIs 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.
Q:What are the minimum and maximum limits of bids in an IDR issuance?
A:Retail Investors: Minimum of Rs 20,000 and maximum of Rs 100,000.
NII: Non-institutional investors have to invest above Rs 100,000 up to the issue size.
QIBs: Institutional investors above Rs100,000 up to the issue size.
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.
Q:What are the rights of and IDR holder?
A:An IDR holder is entitled to rights similar to an equity share holder like voting, bonus and right issues, dividends and other rights as other equity shareholders are eligible. In any case, rights and obligations of the IDR holders will be specified in the Deposit Agreement.
Q:How does investing in IDRs differ from investing in shares of foreign company listed on foreign exchanges?
A:Indian individuals can invest in shares of foreign companies listed on foreign exchanges only upto $200,000 and the process is costly and cumbersome as the investor has to open a bank account and demat account outside India and comply with Know Your Customer (KYC) norms of respective companies. It also involves foreign currency risks. IDR subscription and holding is just like any equity share trading on Indian exchanges and does not involve such hassels.
Q:What is the tax treatment on IDRs?
A:Trading of IDRs- Securities transaction tax (STT) is not applicable on trading of IDRs and thus capital gain transfer of IDRs will be applicable.
Dividends-The issuer company doesn’t pay dividend distribution tax and hence dividends received on account of holding IDRs will be payable by IDR holders.
Q:Why would foreign companies come to India and list themselves in India?
A:Companies could have different objectives for listing in India like:
- It provides enhanced local branding and target business opportunities in India.
- It gives access to the large Indian capital pool and creates opportunities for future fund raising.
- It provides a currency for any acquisition in India which otherwise would be possible only through cash.
Q:Can IDRs be converted into equity shares and can the issuer company issue further IDRs in the future?
A:Under present regulations, conversion of IDRs to equity shares is not permitted.
An issuer company may issue further equity shares based on which additional IDRs may be issued in the Indian markets. This may happen in the case of bonus issue, rights issue or issue of shares in case of any change in the par value, sub-division, consolidation or other reclassification of underlying equity shares or upon any reorganisation, merger or consolidation of the issuer company.
Hope this information is useful. If you have any questions relating to IDRs please feel free to write in to us.
Author name: Praveen Bajaj