The IDR is an instrument issued by a foreign corporation in India, it is similar to ADR(American Depository Receipt) & GDR(Global Depository Receipt). In this case the depository receipt is created by an Indian depository(say National Security Depository Limited (NSDL)..), denominated in Indian Rupees, against the underlying equity shares of the issuing(foreign) company.
How does this work?
The issuer company(here a foreign company) deposits a large number of its shares with a custodian bank, against which a depository(NSDL) issues receipts. There are agreements amongst these parties taking care of legal and procedural aspects. Each receipt is represented by a fixed number of underlying shares(usually 2,4 or a fraction).
The depository banks have numerous responsibilities towards depository receipt holders and also the issuer. These receipts are then sold to investors and, on listing, these receipts behave exactly like regular stocks, their prices then depend upon market conditions.
Why do foreign companies want to go for an IDR?
There are many reasons why a foreign entity wants to raise money through IDR route
1) Against a limited number of Foreign Institutional Investors (FII's) in their local market, many more can be tapped if listed in India.
2) If the foreign company were to issue fresh stock in India for raising capital it has to comply with the stringent,cumbersome procedures of the regulatory authorities (SEBI), which is a main deterrent.
3) It is easier for the investors to trade in foreign companies in local bourses.
An IDR would have the following features:
Overseas Custodian : It is a foreign bank having branches in India and requires approval from Finance Ministry for acting as custodian and Indian depository has to be registered with SEBI.
Approvals for issue of IDRs : IDR issue will require approval from SEBI and application can be made for this purpose 90 days before the issue opening date.
Listing : These IDRs would be listed on stock exchanges in India and would be freely transferable.
Eligibility conditions for overseas companies to issue IDRs:
Capital : The overseas company intending to issue IDRs should have paid up capital and free reserve of atleast $ 100 million.
Sales turnover : It should have an average turnover of $ 500 million during the last three years.
Profits/dividend : Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year during this period.
Sales turnover : It should have an average turnover of $ 500 million during the last three years.
Profits/dividend : Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year during this period.
Debt equity ratio : The pre-issue debt equity ratio of such company should not be more than 2:1.
Extent of issue : The issue during a particular year should not exceed 15% of the paid up capital plus free reserves.
Redemption : IDRs would not be redeemable into underlying equity shares before one year from date of issue.
Denomination : IDRs would be denominated in Indian rupees, irrespective of the denomination of underlying shares.
Benefits : In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment.
Extent of issue : The issue during a particular year should not exceed 15% of the paid up capital plus free reserves.
Redemption : IDRs would not be redeemable into underlying equity shares before one year from date of issue.
Denomination : IDRs would be denominated in Indian rupees, irrespective of the denomination of underlying shares.
Benefits : In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment.
Standard Chartered plc is the first company to have publicy elicited interest in making a IDR issue in India. It raised $540 mn and the IDR was priced at 104 and got listed at 106 on NSE and is currently trading at 111.9 on NSE (19th July).
for more information on IDR
Srikanth Reddy
MBA Core 09-11
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