As you aware the Ministry of Corporate Affairs has notified Companies (Issue of Indian Depository Receipts) Rules, 2004 and subsequently there were amendments on the subject matter and SEBI vide its Circular No. SEBI / CFD / DIL / DIP / 20 /2006 / 3 / 4 dated April 3, 2006 issued by the Securities and Exchange Board of India (SEBI) regarding compliance of SEBI DIP Guidelines for issuance of Indian Depository Receipts by foreign companies in India.
In order to facilitate the eligible companies resident outside India to issue Indian Depository Receipts (IDRs) through a Domestic Depository and to permit persons resident in India and outside India to purchase, possess, transfer and redeem IDRs, vide APDIR Circular No.05 dated July 22, 2009 it has been decided to operationalise the IDR Rules, notified by the Government of India, as amended from time to time, with immediate effect.Accordingly, eligible Foreign Companies may issue Indian Depository Receipts (IDRs) through a Domestic Depository. The permission has been granted subject to compliance with the Companies (Issue of Depository Receipts) Rules, 2004 and subsequent amendments made thereto and the SEBI (DIP) Guidelines, 2000, as amended from time to time. In case of raising of funds through issuance of IDRs by financial/banking companies having presence in India, either through a branch or subsidiary, the approval of the sectoral regulator(s) such as IRDA, RBI in the case of NBFCs should be obtained before the issuance of IDRs.
Investment by Persons resident in India / FIIs / NRIs in IDRs vis-à-vis applicability of FEMA Regulations:
The FEMA Regulations shall not be applicable to persons resident in India as defined under section 2(v) of FEMA, 1999, for investing in IDRs and subsequent transfer arising out of transaction on a recognized Stock Exchange in India. Foreign Institutional Investors (FIIs) including SEBI approved sub-accounts of the FIIs, registered with SEBI and Non-Resident Indians (NRIs) may also invest, purchase, hold and transfer IDRs of eligible Companies resident outside India and issued in the Indian capital market, subject to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, , as amended from time to time. Further, NRIs are allowed to invest in the IDRs out of funds held in their NRE / FCNR(B) account, maintained with an Authorised Dealer / Authorised bank.
Fungibility
Automatic fungibility of IDRs is not permitted.
Period of redemption
IDRs shall not be redeemable into underlying equity shares before the expiry of one year period from the date of issue of the IDRs.
Procedure for transfer and redemption of IDRs.
At the time of redemption / conversion of IDRs into underlying shares, the Indian holders (persons resident in India) of IDRs shall comply with the provisions of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, as amended from time to time. Accordingly, the following guidelines shall be followed, on redemption of IDRs:
- Listed Indian companies may either sell or continue to hold the underlying shares subject to the terms and conditions as per Regulations 6B and 7 of Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time.
- Indian Mutual Funds, registered with SEBI may either sell or continue to hold the underlying shares subject to the terms and conditions as per Regulation 6C of Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time.
- Other persons resident in India including resident individuals are allowed to hold the underlying shares only for the purpose of sale within a period of 30 days from the date of conversion of the IDRs into underlying shares.
- The FEMA provisions shall not apply to the holding of the underlying shares, on redemption of IDRs by the FIIs including SEBI approved sub-accounts of the FIIs and NRIs.
Others
The proceeds of the issue of IDRs shall be immediately repatriated outside India by the eligible companies issuing such IDRs. The IDRs issued shall be denominated in Indian Rupees.
Conclusion:
Resident India – investment in IDR and transaction in IDR as such is not subject to FEMA provisions. However, when a resident in India converting into underlying shares, then it is subject FEMA provisions.
FII, NRI & Foreign National – investment in IDR and transaction in IDR as such is subject to FEMA Provisions. However, when FII,NRI & Foreign National converting into underlying shares, then it will not come under FEMA provisions and subject to host country regulations.
Soon we can expect IDR issues from few Foreign Companies / Banks such as Standard Bank, etc.
