First Indian Depository Receipts (IDRs) Issue – Red Herring Prospectus filed with SEBI by Standard Chartered Plc- a discussion

Saibal C. Pal

On 30^th March, 2010 Standard Chartered Plc (`STANCHART’) filed its draft Red Herring Prospectus with SEBI for its proposed IDR issue. Lead Managers to the issue includes UBS Securities India Pvt. Ltd., Godman Sachs (India) Securities Pvt. Ltd, JM Financial Consultants Pvt. Ltd., DSP Merrill Lynch Ltd., Kotak Mahindra Co. Ltd., and SBI Capital Markets Ltd. Documents were filed through lead managers.  The prospectus is hoisted on the website for public view. StanChart is the first overseas company which is going to be listed on Indian stock exchanges through the maiden IDR issue in the country. Issue size is around $ 500 m through the issue of 220 m IDRs. Listing is targeted in June,2010. End use of the fund proposed to be raised through the issue is to support growth across the business of the company internationally. Stanchart is listed with the London Stock Exchange and its share was quoted at 1,774 pence on 30^th March, 2010 at 8.30 p.m.

The issue is to be through 100 % book building which is defined in R 2(1)(f) of the SEBI( Issue of Capital and Disclosure Requirements) Regulations,2009. The book building process elicits demand and assesses the price for determination of the quantum or value of the IDRs as per the regulations.  SEBI for the first time announced guidelines on IDRs in 2006. RBI framed rules for IDR issues in 2009. IDRs are redeemable by the company raising the same after the completion of one year from their issue. FIIs and NRIs can trade in the IDRs. The IDR issue of STANCHART would result in the dilution of 1.3 % of its capital. Issue price per IDR may be between Rs 100 and Rs 150 a piece and the price which would be finalized close to opening of the issue. About 8-11 IDRs would represent one London listed share. IDRs would be traded on NSE and BSE.

Shares and IDRs– distinguished.

IDR holders will have to pay fee for any share action like dividend payments, sale or purchase, since a custodian will be holding the shares on behalf of the investors and serve the investors. The Red Herring Prospectus (‘RHP’) states that IDR holders will be charged fee of $ 0.016 or less per share and the amount will be deducted by the depository from each cash dividend or other cash distribution. Offer document further states that during rights issue, in the case of  free distribution of shares, dividend, the IDR holders will have to pay a fee determined by the depository to cover cost and expenses.

Taxation of IDRs

IDRs will be taxed at par with other assets at 20 per cent in long term- tax and 30 per cent in short – term tax and probably in dividend distribution tax. Introduction of the Direct Tax Code form the next fiscal (April,1, 2011) may also alter tax treatment of IDRs.

Legal provisions of IDRs

IDR issues are regulated by S 605A of the Companies Act, 1956 read with the Companies (Issue of Indian Depository Receipts) Rules, 2004 and Chapter X of the SEBI (Issue of Capital and Disclosure Requirements) Regulations,2009.  R 98 of the Regulations provides that IDRs are subject to the following conditions:

i.  the  size of each IDR issue  shall not be less than Rs 50 Crore ;

ii. procedure to be adhered by each class of applicant shall be stated in the RHP;

iii. minimum application size shall be of  Rs 20,000/-;

iv. at least 50 per cent of the issue shall  to QIBs on proportionate basis stated in the  illustration stated  in Part C of Schedule XI;

v. balance 50 per cent of the issue shall be allocated among non-institutional investors and retail individual investors including employees at the discretion of the issuer and the manner of allocation shall be disclosed in the RHP; and

vi. at any given time, there shall be only one denomination of IDR of the issuing company.

IDRs may be either underwritten or non-under-written. An issue will have to be subscribed to the extent of 90 per cent. For IDRs not underwritten issues, if 90 per cent of the amount is not raised then the amount received has to be refunded within 15 days of the closure of the issue. For subscription of less than 90 per cent for underwritten issues the underwriters will have to put in the amount underwritten at least within 60 days of the closure of the issue.

R 100 of the Regulations state that the convertibility of IDRs into shares is not automatic and filing of the Red Herring Prospectus through a Merchant Banker is compulsory. The Regulations provide for finalization of the basis of allotment and issue of post-issue reports.

Information Memorandum (`IM’), Red-Herring Prospectus (`RHP’) – provisions as per the Companies Act, 1956 (`ACT’)

S 60 B of the Act states that a company may issue securities by circulating Information Memorandum to the public. The information memorandum must be filed prior to the filing of the prospectus. S 60 B (2) of the Act states that a company inviting subscription by an information memorandum shall be bound to file a prospectus prior to the opening of the subscription list and the offer as a red-herring prospectus at least three days prior to the opening of the offer. The information memorandum and the red-herring prospectus must carry same obligations as are applicable in case of a prospectus. A red-herring prospectus does not include complete particulars on price and number of the securities offered. Variation between information memorandum and the RHP shall be highlighted as variation by the issuing company.

Conclusion

The pioneering act of Stanchart has set the ball rolling for foreign entities that are waiting in the wings to raise funds in through the Indian market.  Success will not only depend on the strength of the company issuing the instrument but also first hand knowledge of such issues which would be under the guidance of merchant bankers. Additionally the investors would have to be educated on IDRs as the instrument is new. Combination of the above is essential for the success of IDRs in the Indian Capital Market.

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