Indian Depository Receipts Introduction

A Depository Receipts (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company. The DR, hich is a physical certificate, allo s in!estors to hold shares in equity of other countries. ".g.. American Depository receipt (ADR), #lobal Depository Receipts (#DR). An $DR is a means for a foreign company to raise money in $ndia. An IDR is a depository receipt denominated in Indian rupees issued by a domestic depository in India. %uch like an equity share, it is an o nership pie of a company. &ince foreign companies are not allo ed to list on $ndian equity markets, $DR is a ay to o n shares of those companies 'ere foreign companies ould issue shares to an $ndian Depository hich ould in turn issue depository receipts ($DR) to in!estors in $ndia and the actual possession of shares underlying the $DRs ould be held by an (!erseas )ustodian, hich shall authori*e the $ndian Depository to issue the $DRs. These receipts can be listed in $ndia and traded in rupees. +ust like o!erseas in!estors in the ,&-listed American Depository Receipts (ADRs) of $nfosys and .ipro get receipts against o nership of shares held by an $ndian custodian, an $DR is proof of o nership of foreign company/s shares. An $ndian in!estor pays in $ndian rupees for the $DR hereas a shareholder in the issuer/s home country pays in home currency.

MEANING
An $DR or #lobal Depository Receipts is an instrument denominated in $ndian Rupees in the form of a depository receipt created by a 0Domestic Depository/ (custodian of securities registered ith &"1$) against the underlying equity of the issuing company in order to enable foreign companies to raise funds from the $ndian securities markets. The receipts are based on a ratio of shares equi!alent to depository receipts. $n!estors ill recei!e depository receipts in demateriali*ed form and each receipt ill represent a certain number of shares. &ince it is not possible to list equity shares of foreign companies in $ndia, $DRs are used as a medium to o n an interest in a foreign company and can be listed on the &tock "xchanges.

$n!estors ould ha!e an exposure to the global business of the foreign company and not only the $ndian business. As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004 ! IDR is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company.

"#A$%R#& '" IDR

IDRs are depository receipts denominated in Indian Rupees issued by a

Domestic Depository in India.

IDRs represent a proportional ownership interest in a fixed number of

underlying equity shares of the issuer company (known as Deposited Shares !.

IDRs gi"e the holder the opportunity to hold an interest in equity shares in an

o"erseas company.

Since it is not possible to list equity shares of foreign companies in India#

IDRs are used as a medium to own an interest in a foreign company and can be listed on the $ombay Stock %xchange and the &ational Stock %xchange in India (the Stock %xchanges !. In"estors would ha"e an exposure to the global business of the foreign company and not only the Indian business. 'or example# the exposure would be to (nile"er (global company! and not )ust *industan (nile"er (the Indian business!.

+n IDR is a mechanism that allows in"estors in India to in"est in listed

foreign companies# including multinational companies# in Indian rupees.

+merican Depository Receipts (+DR, ! and -lobal Depository Receipts

(-DR, ! issued by Indian companies like Infosys# .ipro# I/I/I $ank and /ipla gi"e ownership rights to foreign in"estors in such Indian companies. In

turn IDRs gi"e Indian in"estors equi"alent ownership rights in foreign companies.

IDRs will be issued to in"estors in India through a public issue in the same

way as equity shares are issued in an I01 in India.

Eligible investors to participate in an IDR issue

2ualified Institutional $uyers (2I$s! Domestic Institutional In"estors 'oreign Institutional In"estors and their sub3accounts registered with S%$I

excluding insurance companies and "enture capital funds

&on3Institutional In"estors (&Il!:- /orporates# *igh &et worth Indi"iduals and

&on3resident Indians.
Retail Indi"idual In"estors and %mployees.

(rincipal participants in the IDR "acility

The principal participants in the IDR Facility are:

Issuer Company ! The issuer company must be incorporated outside $ndia and listed in the country of its incorporation.

Domestic Depository ! The Domestic Depository ill issue $DRs representing the underlying equity shares of the issuer company to in!estors in $ndia. The Domestic Depository must be an $ndian entity appointed by the issuer company and registered as a custodian of securities ith &"1$. The Domestic Depository acts as a trustee on behalf of the $DR holders and its rights and obligations ill be as specified in the Deposit Agreement signed bet een the issuer company and the Domestic Depository.

'verseas Custodian ! The issuer company issues equity shares to the (!erseas )ustodian ho holds them on behalf of the Domestic

Depository and on basis of hich the Domestic Depository issues $DRs in $ndia.2 $t is a foreign entity appointed by the Domestic Depository.

$he Registrar and $ransfer Agent ()R*$ Agent+) ! R3T Agent pro!ides ser!ices to the issuer company, the Domestic Depository and the $DR holders in $ndia primarily being registration and transfer of $DRs in $ndia. "xamples of ser!ices include keeping records of the $DR holders, coordinating corporate actions and handling in!estor grie!ances.

,egal frame -or. for IDR

$t is go!erned by )ompanies ($ssue of $ndian Depository Receipts) Rules, 4556 ($DR Rules) pursuant to the section 758 A of the companies Act. &"1$ issued guidelines for disclosure ith respect to $DRs and notified the model listing agreement to be entered bet een exchange and the foreign issuer specifying continuous listing requirements.
Statutes Governing IDRs are given as below:

&ection 758A of the )ompanies Act, 9:87 )ompanies ($ssue of $ndian Depository Receipts) Rules 4556 )hapter ;$A of &"1$ ($ssue of )apital and Disclosure Requirements) Regulations, 455:

The #o!ernment of $ndia has taken steps to liberali*e $ndia/s corporate and securities la s to permit foreign companies to raise capital in $ndia. As the ADR and #DR became popular globally, the $ndian #o!ernment amended the )ompanies Act, 9:87 by implementing &ection 758-A hich permits a foreign company to make a public offer of its shares to $ndian in!estors in the form of $DRs. $t gi!es the )entral #o!ernment the po er to create the rules, regulations and conditions go!erning<

The offer and issue of $DRs by a foreign company= The rules and regulations go!erning the treatment of $DRs by the Depository, )ustodian and ,nder riters= The disclosure requirements in the prospectus issued for $DRs= The manner of sale, transfer or transmission of $DRs in the stock exchanges.

#ligi/ility of companies to issue IDRs

According to Rule 4 ,an issuing company may issue $DRs only if it satisfies the follo ing conditions ! $t has had an a!erage turno!er of ,&> 855 million during the ? financial years preceding the issue. $ts pre-issue paid-up capital and free reser!es are at least ,&> 955 millions $ts pre-issue debt equity ratio is not more than 4<9. $t has been making profits for at least fi!e years preceding the issue and has been declaring di!idend of not less than 95@ each year for the said period. $t shall fulfill the eligibility criteria laid do n by &"1$ from time to time in this behalf.
Other conditions for the issue of IDRs:

$DRs shall not be redeemable into the underlying equity shares before the expiry of one year period from the date of the issue of the $DRs. The repatriation of the proceeds of issue of $DRs shall be subAect to la s for the time being in force relating to export of foreign exchange. $DRs issued by any issuing company in any financial year shall not exceed 98 per cent of its paid-up capital and free reser!es. The denomination of securities of an issuing company, the $DRs issued it shall be denominated in $ndian Rupees.

Burthermore, the &"1$ has introduced of $ssue of )apital and Disclosure Requirements Regulations,455: (CICDR RegulationsD)0After ards !arious amendments ha!e been made in the regulatory frame ork of $DRs hich renders clarity on the exchange control implication for in!estment in $DRs such as the recent )ircular dated +uly 44, 455: (CR1I CircularD) issued by the R1$, the exchange control regulator in $ndia. According to Regulation 23 of ICDR , an issuing company making an issue of $DR shall also satisfy the follo ing<

the issuing company is listed in its home country= the issuing company is not prohibited to issue securities by any regulatory body=

the issuing company has track record of compliance market regulations in its home country.

ith securities

IDR Issue (rocess

"ligible companies resident outside $ndia are allo ed to issue $DRs through a Domestic Depository pursuant to )ircular Eo. &"1$ F )BD F D$G F D$H F 45 F4557 F ? F 6 dated April ?, 4557 and the pro!isions of $ssue of )apital and Disclosure Requirements (C$)DRD) Regulations 455:. According to &"1$ guidelines, $DRs ill be issued to $ndian residents in the same ay as domestic shares are issued. The issuer company ill make a public offer in $ndia, and residents can bid in exactly the same format and method as they bid for $ndian shares. The issue process is as follo s< A Draft Red 'erring Hrospectus (CDR'HD) ould be prepared by the )ompany and the 1ook Running Gead %anagers (C1RG%8D) hich ould be examined by &"1$. The same ould be a!ailable on the ebsites of &"1$ and the 1RG%s.
After clearance from &"1$, issue dates

ill be announced and a Red 'erring Hrospectus (CR'HD) ill be submitted to Registrar of )ompanies (R5)). ill be announced prior to the issue opening date and in!estors can apply for $DRs by completing an application form during the issue period. ill be credited into the demateriali*ed ill trade on the accounts of the $DR holders.

The price band

(nce the issue price has been finali*ed, $DRs

(nce the issuer company gets listing and trading appro!al, the $DRs

&tock "xchanges as in the case of an $H( in $ndia.

Reservations in IDR issues

According to current regulations regarding the allocation is as follo s<

4ualified Institutional 1uyers (4I1s) %inimum 85@ of the issue to be allotted. $nstitutional in!estors abo!e Rs 9, 55,555 up to the issue si*e. Retail Investors ?5@ of the issue to be offered to retail indi!idual in!estors. %inimum limit of bids is Rs 45,555 and maximum of Rs 955,555.

5on!institutional investors (5Il) * #mployees E$l ha!e to in!est abo!e Rs 955,555 up to the issue si*e. 1alance of 45@ to be apportioned bet een E$ls and "mployees at the discretion of the issuer company.

,nder-subscription in any of the categories other than the I$1 category can be adAusted against o!ersubscription in other in!estor categories. Eo $DR holder can indi!idually o n more than 8@ of the total $DRs issued except for I$1s hich can hold up to 98@ of the $DR issued. Rights of an IDR holder The rights and obligations of the $DR holders ill be specified in the Deposit Agreement and ill be summari*ed in the DR'H. An $DR holder ill be entitled to rights on an equitable basis !is-J-!is the rights of shareholders of the issuer company in its home country.$DR holders ill ha!e rights of legal recourse against the issuer company as ell as the Domestic Depository as pro!ided under the Deposit Agreement. &ome of the rights of the $DR holders include ! ;oting rights. "ntitlement to bonus issues. "ntitlement to di!idends. Harticipation in rights issues. Harticipation in sub-di!isions and consolidations of underlying equity shares. Harticipation in other distributions and corporate actions. These rights ill be exercised through the Domestic Depository and the (!erseas )ustodian if they are practicable and legally feasible. $n case any distribution of equity shares is not possible to in!estors in $ndia, either due to practical or legal issues, the Domestic Depository ill generally sell the equity shares and pay any cash (after certain fees and expenses) to the $DR holders. (rocess to get distri/utions /y an IDR holder The Domestic Depository ill notify the $DR holders of such distributions. The distributions ill be a!ailable to the $DR holders as of a record date hich

ill be fixed by the Domestic Depository .The process is similar to distribution or corporate action by any $ndian company in $ndia<2 $n the case of a bonus issue, the proportionate $DRs ill be credited into the demateriali*ed account of the $DR holders.2 $n the case of a cash di!idend, the di!idend ill either be credited to a bank account or arrants ould be dispatched to $DR holders.2 $n the case of a rights issue, the Domestic Depository ill make application forms a!ailable to the $DR holders= the $DR holders can apply for their proportionate rights. (nce the (!erseas )ustodian gets the underlying equity shares, the Domestic Depository ill credit the $DRs to the demateriali*ed account of the rele!ant $DR holders. $n case it is not practical or legally possible to distribute underlying equity shares, such underlying equity shares or interest in such underlying equity shares ill generally be sold by the Domestic Depository and any resulting cash (after certain fees and expenses) ould be paid to the $DR holders. $f there are different regulatory requirements in $ndia and the home country of the issuer company, especially in terms of rights issues, it may not be possible to make rights issues a!ailable to $DR holders. $n such a case rights entitlements ould generally be sold on the home country market and any resulting cash (after certain fees and expenses) ould be paid to the $DR holders.

$a6 treatment on IDRs

$ndian in!estors need to consider the tax implications of in!estment in the $DRs. .hile &ection 758A of the )ompanies Act, 9:87 (the C)ompanies ActD) discusses $DRs, there are no specific pro!isions regarding capital gains taxation of $DRs in the )ompanies Act or in the $ncome Tax Act, 9:79. Therefore, the general rules relating to capital gains taxation apply and no benefits for long term holders of $DRs (i e. if the &ecurities Transaction Tax is paid, there is no capital gains tax on long term holders of listed securities) are a!ailable.

&econdary trading of $DRs is not subAect to &ecurities Transaction Tax (C&TTD) and hence capital gains tax ill be payable on any trading profits.

Di!idend distribution tax is not payable by the issuer company and hence such tax ill be payable by the $DR holders.

The Direct Taxes )ode (CDT)D) as currently drafted does not distinguish bet een capital gains tax treatment of listed shares and other assets such as $DRs, so, if the DT) is implemented in its present form, there ill be parity of treatment. The DT) also makes no distinction bet een long term and short term capital gains. As the DT) has not yet been implemented, the pro!isions summari*ed abo!e could change.

Can IDRs /e converted7

$DR holders ill ha!e to ait for an year after issue before they can demand that their $DRs be con!erted into the underlying shares and ith the prior appro!al of the R1$ 'o e!er this con!ersion is subAect to certain conditions< a) $DR 'olders can con!ert $DRs into underlying equity shares only ith the prior appro!al of the R1$. /) ,pon such exchange, indi!idual in!estors resident in $ndia are allo ed to hold the underlying shares only for the purpose of sale ithin a period of ?5 days from the date of con!ersion of the $DRs into underlying shares c) )urrent regulations do not pro!ide for exchange of equity shares into $DRs after the initial issuance i.e. re!erse fungibility is not allo ed.

IMPORTANCE OF IDR
$DRs are a important step to ards the internationali*ation of the $ndian security markets hich ould also be a possible benefit for the domestic in!estors in $ndia. The concept of the $DR is meant to di!ersify your holdings across regions to free from a Cregion biasD or the risk of a portfolio getting too concentrated in the home market. (ne has to study the firm/s financial condition before you buy its $DR so that one cannot be defrauded or misrepresented. &ince these $DRs are listed, bought and sold on the $ndian markets, the impact of global markets and exchange-rate risks are reduced, though not totally eliminated. Benefits to the ISSUING C !"#N$:

$t pro!ides access to a large pool of capital to the issuing capita $t gi!es brand recognition in $ndia to the issuing company $t facilitates acquisitions in $ndia Hro!ides an exit route for existing shareholders

Benefits to IN%ES& RS:

$t pro!ides portfolio management and di!ersification to the in!estors by gi!ing them a chance to buy into the stocks of reputed companies abroad. $t gi!es the facility of ease of in!estment There is no need to kno your customer norms. Eo resident $ndian indi!idual can hold more than >455,555 orth of foreign securities purchased per year as per $ndian foreign exchange regulations. 'o e!er, this ill not be applicable for $DRs hich gi!es $ndian residents the chance to in!est in an $ndian listed foreign entity.

Benefits to E!"' $EES:

Boreign companies that do not ha!e a listed subsidiary in $ndia can gi!e employee stock options ("&(Hs) to the employees of their $ndian subsidiaries through the $DR route. This ill enable the local employees to participate in the parent companies/ success.

Benefits to REGU'#& R: $DRs ill lead to more liquid capital markets and a continuous impro!ement in regulatory en!ironment, thereby increasing transactional re!enues for the regulator. Benefits to ( REIGN C !"#NIES:
+ company which has significant business in India can increase its "alue

through IDRs by breaking down market segmentations# reaching trapped pools of liquidity# achie"ing global benchmark "aluation# accessing

international shareholder base and impro!ing its brand/s presence through global !isibility. Also, differences in tax structure, regulatory restrictions and informational constraints bet een the countries may also help in creating economic benefits. &imilarly, the foreign entities of

$ndian companies may find it easier to raise money through $DRs for their business requirements abroad.. Benefits for IN&ERN#&I N#' ISSUERS: The main benefit ould be in terms of branding, besides allo ing foreign companies to access $ndian capital. $DRs also allo the creation of acquisition currency and a management incenti!e tool. $ssuers ha!e the option to reser!e a proportion of the issue for their employees. Benefits of IDR can be su))ari*e+ as: $ndian in!estors gets chance to in!est in foreign entity "asier Access to $DR/s than shares 1enefits of shares accrue to $DR/s also $nternational issuers 1randing %anagement Hool Reser!e a proportion for employees )ompanies in $ndia ha!e reached out to the global equity markets in the past by issuing ADR and #DR .$t no appears that the it is high time for a role re!ersal. the $ndian Depository Receipt (C$DRD) mechanism offers to o!erseas companies seeking to raise capital from the $ndian stock markets ..ith the introduction of the $DR regime, not only it has ad!anced an additional a!enue for foreign companies to raise capital in $ndia, but also, an additional flexible route for $ndian in!estors to in!est in global corporations. &o e can say that $DRs are a important step to ards the globali*ation of the $ndian security markets hich ould also be benefit for the in!estors in $ndia.