Abstract

Since a long while, Indian companies have been raising funds from foreign markets. The
trend still continues but with issuers and investors having changed sides. With liberalization
and a booming economy, foreign companies are betting on India story in a big way.
Indian Depository Receipts (‘IDRs’) are financial instruments that allow foreign companies
to mobilize funds from Indian markets by offering equity and getting listed on Indian stock
exchanges. IDRs are similar to the Global Depository Receipts and American Depository
Receipts, which allow companies to raise funds from European and American markets,
respectively. The government opened this window for foreign companies to raise funds from
the country as part of its efforts to globalize the Indian capital market and to provide local
investors with exposure in global companies.1 Despite the existence of a detailed legal
framework on the subject and IDRs being a viable funding option the issuers have been
reluctant to come out with an IDR issue to raise capital from Indian investors. The foreign
companies see the existing regulations on IDR as quite onerous prescribing strict eligibility
criteria so they feel comfortable in raising money from their own markets which are more
robust in nature as compared to India. India is gradually moving towards capital account
convertibility and Indian investors are looking out for investment opportunities outside India.
In the past couple of years, there have been several deals wherein Indian companies have
made overseas acquisitions. Considering the exchange control regulations there are very few
opportunities for the Indian investors to participate in global capital markets. Investments in
Indian depository receipts (IDRs) appear to be an interesting opportunity for the Indian
investors to satisfy their appetite for the foreign equity.2
Keywords: Indian Depository receipts, Global Depository Receipts, SEBI, FEMA, Income
Tax Act, 1961
AARJSH VOLUME 3 ISSUE 5 (MAY 2016) ISSN : 2278 – 859X
Introduction:
1.1 Indian Depository Receipts:
What are they?
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. In an IDR, foreign
companies would issue shares, to an Indian Depository (say National Security Depository
Limited – NSDL), which would in turn issue depository receipts to investors in India. The
actual shares underlying the IDRs would be held by an Overseas Custodian, which shall
authorise the Indian Depository to issue the IDRs3
IDRs are like American Depository Receipts or Global Depository Receipts, except that the
issuer is a foreign company raising funds from the Indian market. IDRs are rupeedenominated
and created by a domestic depository against the underlying equity shares of a
foreign company4.
Who can issue them?
Any company listed in the country of incorporation can issue IDRs. Besides, the issuer needs
pre-issue capital and free reserves of at least $50 million (around Rs 225 crore) and should
have a market capitalisation of $100 million (Rs 450 crore) or more during the last three
years. The company should have also made profits in three of the preceding five years.5
How will they work?
The process is similar to an initial public offering where a draft prospectus is filed with the
Securities and Exchange Board of India.
The minimum issue size is $500 million (around Rs 2,250 crore). Shares underlying IDRs
will be deposited with an overseas custodian who will hold shares on behalf of a domestic
depository. IDRs will be issued through a public offer in India in the demat form and will be
listed on Indian exchanges. Trading and settlement will be similar to those of Indian shares.
At least half of the investors have to be qualified institutional investors with 30 per cent of
the issue size reserved for small investors. Recently, the regulators allowed a single
3 Indian Depository Receipt: Framework in India, http://pratikshah.wordpress.com/2010/05/13/indiandepository-
receipt-framework-in-india/, visited 24 August 2011
4 http://www.business-standard.com/india/news/indian-depository-receipts-faqs/390215/ visited on 21 August
2011
5 Ibid

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institutional investor to acquire up to 15 per cent of the issue size. In addition, banks have
also been allowed to participate.
For a retail investor, the annual $200,000 ceiling (Rs 90 lakh) on overseas remittances, which
can be used to buy shares, will not apply to IDRs, as the issues are rupee-denominated.
Will Indian investors get equal rights as shareholders?
Except attending annual general meetings and voting on resolutions, other rights are
available.
The main benefit is in terms of branding, besides allowing foreign companies to access
Indian capital. It is also seen as the platform for creation of acquisition currency and a
management talent pool. Issuers have the option to reserve a proportion of the issue for
employees.