Long time back an eminent Chinese philosopher, Lao Tse Tung said, ‘Even a march of civilization starts with a single step’. The introduction of Indian Depository Receipts (IDR) in the global arena is that little first step towards a new era of Indian capital market. Needless to say, it is no more theory, but a blatant fact that in near future, India is going to be an economic super power. Hence, it will certainly have to integrate with the world of today and make its market accessible to the world. An IDR issue is just an example of the confidence shown by world in Indian economy and a tiny but great leap forward in the race of becoming an economic superpower.
The scope of this paper is restricted to the functioning of IDRs in the Indian Capital Market. It will only deal with the laws governing securities in India and will explain the implication of IDRs from both the investors and issuing company’s perspective.
This paper aims to give a brief overview on the laws relating Indian Depository Receipts. In this course the paper will first explain the functioning and the implication of issue of IDR in the capital market. It will then discuss the market players (intermediaries) involved in the entire process. In the final section, the paper will deal with the procedural requirements and eligibility criteria for the issuer company in order to issue IDRs.
The research methodology used in the paper is descriptive as well as analytical. Several provisions of the statute are described firstly and thereafter they are analyzed to provide implications of IDRs. Moreover, provisions of statutes and regulations are analyzed to arrive at the conclusion.
In India the “Indian Depository Receipt” (hereinafter referred to as ‘IDR’) is defined as any instrument in the form of a depository receipt created by a Domestic Depository in India and authorized by a company incorporated outside India making an issue of such depository receipts. It is similar to an equity share. In fact as IDR holder is entitled to rights similar to an equity share holder like bonus and right issues, dividends, voting rights and other rights which an equity shareholder possess.
In a sense IDRs are a kind of derivatives which derive their values from the underlying assets in this case the foreign companies’ shares. It is clear from the above definition that IDR is a depository receipt. It is denominated in Indian rupees issued by a domestic depository in India. Since, under the SEBI guidelines the foreign companies, like Google Inc. Microsoft Corp. etc, are not allowed to be listed in the Indian stock market, hence IDR is a way to own shares of those companies. Basically, these IDRs get listed on Indian stock exchange, which makes it possible for the Indian investors to directly buy the shares being in India itself, instead of taking his money to abroad.
Foreign Companies perspective –
It is the foreign companies see the Indian market as an unexplored territory with hidden treasure. Quite naturally they are attracted towards the Indian market and it is the IDRs which gives them the way to easy access to the large Indian capital pool and creates opportunities for future fund raising. This gives the foreign companies an opportunity to enhance the local branding. It provides a currency for any acquisition in India which otherwise would be possible only through cash.
Indian Investors perspective-
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 hassles.The only example that we have in India at present is the IDR issue of Standard Chartered Bank. The issue of IDRs concluded with the proportional ownership of 10:1. That is 10 Indian Depository Receipts represented 1 equity share of the Bank.
It is quite evident from the above discussion that issue of IDRs involves international collaboration, which makes it a process which is loaded with intermediaries and different market players. These intermediaries are recognized by the participating countries and in turn essential to complete the process of issue of IDRs. Fundamentally, there are essentially four intermediaries involved in this process. These are Issuer Company, Overseas Custodian Bank, Domestic Depository and Merchant Banker.
Quite naturally the ‘Issuer Company’ is the foreign company which intends to raise money through issue of IDRs. For instance, companies which are known in Indian as much they are known all over the world, like Google, Facebook, Starbuck etc., recognize the Indian stock market as the potential hub in order to raise funds. Essentially, these are the companies which play the role of Issuer Company in order to issue IDRs. Regarding the foreign companies (issuer companies), it should always be kept in mind that they should be listed in its country incorporation or where there registered office is situated.
The second intermediary is an ‘Overseas Custodian Bank’. It is a banking company which is established in a country outside India and has a place of business in India and acts as custodian for the equity shares of issuing company, against which IDRs are proposed to be issued by having a custodial arrangement or agreement with the Domestic Depository or by establishing a place of business in India. Essentially these banks are appointed by the domestic depository which then acts as the safety valves for the foreign investor (Indian investors) of the countries, assuring them the authenticity of the company and its shares. These banks are the holder of equity shares on behalf of the Domestic depository.
The third and the most important intermediary in the entire process of raising funds via IDRs is ‘Domestic Depository’. A domestic depository is an intermediary institution that helps the foreign companies to raise funds from Indian market via IDRs. It is an Indian entity appointed by the issues company and registered as a custodian of securities registered with the Securities and Exchange Board of India and authorized by the issuing company to issue IDRs. It acts as a trustee on behalf of the IDR holder by issuing IDRs representing underlying equity shares of the issuer company. It should also be kept in mind that the obligations and the legal rights of the domestic depository is usually specified in the deposit agreement signed between the issuer company and the domestic depository.It also bears the rights and obligations of the IDR holders.It is this reason that the deposit agreement is recognized as one of the most important document during the issue of IDRs.
The last intermediary in the entire process is the ‘Merchant Banker’. He is defined in sub-regulation (cb) of regulation 2 of the Securities and Exchange Board (Merchant Bankers) Regulations, 1992. As per the regulation, a merchant banker means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management. He is the person who is responsible for due diligence and it is through him from where the draft prospectus for issuance of the IDR is filed with SEBI bythe issuer company.
Ever since the introduction of Indian Depository Receipts, the eligibility criteria in order to issue IDRs have not been changed. It has to be noted that even after completely revamping the Company Act the procedural requirement and eligibility criteria for issue of IDR have not been changed. Although, because of the Companies Act, 2013 the Central Government had to notify new set of rules regarding IDRs in exercise of the power conferred by section 390 , which they did in 2014 by enacting and notifying the Companies (Registration of foreign Companies) Rules, 2014 (hereinafter ‘the rules’), but the rules notified 2014 were same as they were in the Companies (Issue Of Indian Depository Receipts) Rules, 2004.
As per the Rule 13 of the Companies (Registration of foreign Companies) Rules, 2014, a foreign company, in order to be able to issue IDRs and raise money from the Indian market, has to have a pre-issue paid-up capital and free reserves are at least US$ 50 million and it has a minimum average market capitalization (during the last three years) in its parent country of at least US$ 100 million. The company also has to ensure that it has been continuously trading on a stock exchange in its parent or home country (the country of incorporation of such company) for at least three immediately preceding years. It should have a track record of distributable profits in terms of section 123 of the Act, for at least three out of immediately preceding five years. Needless to mention, but the directors of the company also need to keep in mind that the fulfil other eligibility criteria as may be laid down by the Securities and Exchange Board of India from time to time with regard to issue of IDRs.
Like the eligibility criteria. Even the procedural requirement in order to issue IDRs have not changed since 2004. Although they have been reincorporated in Companies (Registration of foreign Companies) Rules, 2014, but the rules are almost identical with only one or two changes. There are several stages in the procedure of issue of IDRs, the following are the different stages:
Each and every activity that deals with securities or capital market in India, is governed by Securities and Control Board of India (Hereinafter ‘SEBI’). Hence, needless to say, the issuing company in case of an application made in behalf for issue of IDRs along with the issue size has to necessarily obtain a written approval from the SEBI. It should be noted that apart from SEBI, the issuing company is also required to mandatorily obtain the necessary approval from the analogous body (same as SEBI) from the country of its incorporation under the relevant laws to issue the IDRs.
A prospectus or letter of offer is a document prepared by the issuer company where it gives the (a)general information regarding issue date, closing date etc, (b)capital structure of the company, (c) terms of the issue, (d) particulars of the Issue, (e) company, management and project, (f) audit reports, (g) other information regarding subscription and (h) place of inspection of documents.
Hence, after drafting the prospectus with the above mentioned information, the issuing company has to file a prospectus, stating the particulars of the resolution of the Board by which it was approved with the SEBI and Registrar of Companies, New Delhi before such issue. It is very important to remember that this prospectus has to be certified by two authorized signatories of the issuing company, one of whom shall be a whole-time director and other the Chief Financial Officer. It also has to be noted that a prospectus to contains all the particulars as prescribed in rule 13, sub-rule (8) of the Companies (Registration of foreign Companies) Rules, 2014.
Now, at the time of filing of said prospectus with the Registrar of Companies, New Delhi, a copy of approval granted by the SEBI and the statement of fees paid by the Issuing Company to the SEBI shall also be attached.
The issuing company shall appoint an overseas custodian bank, a Domestic Depository and a Merchant Banker for the purpose of issue of IDRs. However, the appointment of underwriters in optional in India and is based on the discretion of the issuing company. Hence, if the issuing company appoints the underwriters then it should sure that these underwriters are registered with the SEBI to underwrite the issue of IDRs.
According to the rules, an application under Rule 13(b), sub rule 3 is to be submitted before the SEBI (alongwith draft prospectus) at least 90 days to prior to the date when the IDRs issue is to opened, in such form along with such fee and furnishing of such information which may be prescribed by the Securities and Exchange Board of India periodically. The issuing company is also required to file through a Merchant Banker, a due diligence report along with the application under clause (b) in the form prescribed by SEBI.
The SEBI may within thirty days of receiving an application under clause C, ask for such information or explanation to be furnished which it thinks is germane while disposing of such an application. SEBI is obliged to then dispose of the application within thirty days of receiving such information or explanation. If SEBI requires any changes to be made in the draft prospectus within sixty days of the submission of that application or draft prospectus, then that prospectus cannot be filed with SEBI without the incorporation of those changes.
The issuing company shall on approval being granted by the Securities and Exchange Board of India to an application under clause (b), pay to the Securities and Exchange Board of India an issue fee as may be prescribed from time to time by the Securities and Exchange Board of India.The position is change…initial there was a limit
After getting the approval from SEBI, floating the certified prospectus via SEBI and appointing the intermediaries, the final stage is of delivery of the equity shares. Technically, the issuing company delivers the underlying equity shares or causes them to be delivered to an Overseas Custodian Bank and then from there the delivered equity shares are authorized by the said bank shall to the domestic depository to issue IDRs. Ultimately, after following the entire above mentioned procedure, the issuing only has to ask for the in-principle listing permission from at least one stock exchange having nationwide trading terminals in India.
Insurance companies, one of the largest investor in most public offering and shareholder in many Indian companies, are not permitted to invest in IDRs. Further, the Securities transaction tax (STT) is not applicable on trading of IDRs and thus capital gain transfer of IDRs will be applicable. The issuer company doesn’t pay dividend distribution tax and hence dividends received on account of holding IDRs will be payable by IDR holders.
 Rule 13.1. explanation
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Explanation iii, Rule 13.
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Explaination ii, Rule 13.
 Supra note 7.
Supra note 7.
 Supra note 15, 13.2.explanation ii.
sub-regulation (cb) of regulation 2 of the Securities and Exchange Board (Merchant Bankers) Regulations, 1992.
Sebi write up in laptop-foreignnsna.
 Companies Act, 2013.
In exercise of powers conferred by clause (a) of sub-section (1) of section 642 read with section 605A of the Companies Act, 1956.
 Supra note 15, Rule 13.2.a.
 Supra note 15, Rule 13.2.b.
 Companies Act,2013.
 Supra note 15, Rule 13.2.c.
 Supra note 15, Rule 13.2.d.
Companies (Issue Of Indian Depository Receipts) Rules, 2004.
 Supra note 15, 13.3.a.
 Supra note 15, Rule 13.2.g.
 Supra note 15, Rule 13.2.f.
 Supra note 15, Rule 13.2.h.
 Supra note 15 , Rule 13.2.i.