Vol 4 (2007) - Issue 6

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Indian Depository Receipts: Raising Capital in India

Introduction

For many decades, Indian companies have been raising funds from foreign markets. The trend still continues but it is time to flip the coin and witness the other side. With liberalisation and a booming economy, foreign companies are investing in India in every possible way.

Indian Depository Receipts (‘IDRs’) are financial instruments that allow foreign companies to mobilise 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 globalise the Indian capital market and to provide local investors with exposure in global companies.

Legal and regulatory regime in India

The provision enabling the issue of IDRs was introduced in the Companies Act, 1956 (the ‘Act’) by the Companies (Amendment) Act, 2000 in the form of section
605A of the Act, which gave power to the Government of India to make rules for the offer of IDRs and related matters.

In February 2004, the Government of India passed the Companies (Issue of Indian Depository Receipts) Rules 2004 (the ‘IDR Rules’), building on the amendments
in December 2000 to the Act, to allow foreign companies to sell securities to Indian investors. Under Rule 4(d) of the IDR Rules, the Securities and Exchange
Board of India (‘SEBI’) has the power to specify eligibility criteria for IDR issuers, in addition to what is contained in the IDR Rules. Under Clause 9 to the Schedule to the IDR Rules, SEBI can specify any information to be included in the prospectus from time to time. Accordingly,for companies desirous of coming out with ID Rissues, a new Chapter VI A has been added in the SEBI (Disclosure and Investor Protection) Guidelines 2000, containing the guidelines to be followed by an IDR issuer for coming out with such an issue.

In an IDR, foreign companies issue shares to an Indian Depository, which would, in turn, issue Depository Receipts to investors in India. The Depository Receipts would be listed on stock exchanges in India and would be freely transferable. The actual shares underlying the IDRs would be held by an Overseas Custodian, which authorises the Indian Depository to issue the IDRs. The Overseas Custodian is required to be a foreign bank having a place of business in India and needs approval from the Finance Ministry for acting as a Custodian, while the Indian Depository needs to be registered with SEBI. An IDR issue needs to be approved by SEBI and an application in this regard has to be made a minimum of 90 days before the issue-opening date. The issuing company shall deliver the underlying equity shares or cause them to be delivered to an Overseas Custodian Bank and the Custodian Bank shall authorise the domestic depository and a merchant banker for the purpose of issue of IDRs. The overseas company also has to file a due diligence report and a Prospectus or Letter of Offer with SEBI and the Registrar of Companies. Furthermore, the overseas company will have to obtain in-principle permission for listing on stock exchanges in India. The IDR Rules also elaborate on the documents to be delivered by the merchant banker to the issue of IDRs to SEBI and the Registrar of Companies, New Delhi. Furthermore, the IDR Rules also outline ongoing disclosure requirements.