Index

Sr. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Executive Summary Introduction to IDR IDR Issue Process Legal framework for IDR Eligibility for issue of IDR Impact on key Stakeholders Standard Chartered : Sole IDR in India Future Challenges of IDR in India Need of an IDR Conclusion Annexures Bibliography Contents Page No. 2 3 4 5 5 6 7 8 10 10 11 15

Executive Summary
An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. It provides benefits to: Issuing Company by providing access to a large pool of capital, Giving brand recognition, Facilitating acquisitions in India and also provides an exit route for existing shareholders

Investors by providing portfolio diversification to the investor, Facility of ease of investment and No need to know your customer (KYC) norms. Employees in Foreign companies which do not have a listed subsidiary in India can give employee stock options (ESOPs) to the employees of their Indian subsidiaries through the IDR. But IDR still have some challenges to be met:

Stringent eligibility norms No automatic fungibility No Interest & exchange rate arbitrage opportunity Lack of clarity on taxation issue

Certain provisions and regulations relating to IDRs were not clear earlier and it was the main reason that it did not evoke interest in many foreign companies to
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come forward to launch IDR issues. Now most of the amendments and clarifications are in place and with the clear-cut regulations/clarifications regarding taxation of IDRs, we hope that more companies would launch IDR issues and, thus, in the near future, IDRs will also become as famous as American Depository Receipt (ADR) or Global Depository Receipt (GDR).

Introduction
An Indian Depository Receipt is a means for a foreign company to raise money in India. An IDR is a depository receipt denominated in Indian rupees (INR) issued by a domestic depository in India. Much like an equity share, it is an ownership pie of a company. Since foreign companies are not allowed to list on Indian equity markets, IDR is a way to own shares of those companies. Here foreign companies would issue shares to an Indian Depository which would in turn issue depository receipts (IDR) to investors in India and the actual possession of shares underlying the IDRs would be held by an Overseas Custodian, which shall authorize the Indian Depository to issue the IDRs. As per the definition given in the Companies (Issue of IDRs) 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. These IDRs are listed on Indian stock exchanges. You need not take the trouble of taking your money abroad yourself, but can invest rupees into the international companies that have now begun to come at your doorstep Earlier position The RBI has allowed investments in international equity instruments up to $200,000 (Rs94.8 lakh). Since you need to have a bank account with funds in the
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same countrys currency and a demat account in the country in which you invest, it may turn out to be a cumbersome process. Another alternative is to go to domestic mutual fund (MF) that invests its corpus abroad in a foreign fund, which invests in international companies or directly in scrips. But mutual funds are directly affected by currency-exchange risk because your investments in Indian rupees are converted into global currencies before they are deployed in the international markets. The recent winding up of Franklin India International Fund, a feeder fund that invested in US government securities, besides underperformance by several other international funds over the past three years, shows that these funds are fraught with exchange-rate and global market risks.

IDR Issue Process

Eligible companies resident outside India are allowed to issue IDRs through a Domestic Depository pursuant to Circular No. SEBI / CFD / DIL / DIP / 20 /2006 / 3 / 4 dated April 3, 2006 and the provisions of Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009 (which replaced the SEBI (Disclosure and Investor Protection) Guidelines, 2000). In addition, the Circular and the ICDR Regulations 2009, permit persons resident in India and outside India to purchase, possess, transfer and redeem IDRs. Qualifying companies resident outside India issue IDRs through a Domestic Depository subject to compliance with the Companies (Issue of Depository Receipts) Rules, 2004 and subsequent amendments made thereto and the ICDR Regulations, 2009. The SEBI guidelines permit only those companies listed in their home market for at least three years and which have been profitable for three of the preceding five years to make IDR issues. As the issuance of the IDR by SCP is the first IDR ever undertaken, there are a number of challenges including the structure of the instrument, how one trades in it, what kind of returns can be made on the instrument, and what are the risks involved. According to SEBI guidelines, IDRs will be issued to Indian residents in the same way as domestic shares are issued. The issuer company will make a public offer in India, and residents can bid in exactly the same format and method as they bid
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for Indian shares. The issue process is exactly the same: the company will file a draft red herring prospectus (DRHP), which will be examined by SEBI. The general body of investors will get a chance to read and review the DRHP as it is a public document, available on the websites of SEBI and the book running lead managers. After SEBI gives its clearance, the company sets the issue dates and files the document with the Registrar of Companies. In the next step, after getting the Registrars registration ticket, the company can go ahead with marketing the issue. The issue will be kept open for a fixed number of days, and investors can submit their application forms at the bidding centers. The investors will bid within the price band and the final price will be decided post the closure of the Issue. The receipts will be allotted to the investors in their demat account as is done for equity shares in any public issue. On 256th October 2010, SEBI notified the framework for rights issue of Indian Depository Receipts (IDRs). Disclosure requirement for IDR rights would more or less be in line with the reduced requirement applicable for domestic rights issue. (Refer Annexure A-1) Legal frame work for IDR Statutes Governing IDRs are given as below:

Section 605A of the Companies Act, 1956 Companies (Issue of Indian Depository Receipts) Rules 2004

Chapter VIA of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 In 2004, the IDR Rules were introduced and set the framework for the issuance of IDRs.

Eligibility for Issue of IDRs

According to Rule 4, an issuing company may issue IDRs only if it satisfies the following conditions: It has had an average turnover of US$ 500 million during the 3 financial years preceding the issue.

Its pre-issue paid-up capital and free reserves are at least US$ 100 millions Its pre-issue debt equity ratio is not more than 2:1.
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It has been making profits for at least five years preceding the issue and has been declaring dividend of not less than 10% each year for the said period.

It shall fulfill the eligibility criteria laid down by SEBI from time to time in this behalf.

(Refer Annexures A-2, A-3 & A-4)

Impact on the key stakeholders

1. Issuing Company A company which has significant business in India can increase its value through IDRs by breaking down market segmentations, reaching trapped pools of liquidity, achieving global benchmark valuation, accessing international shareholder base and improving its brands presence through global visibility.

Provides access to a large pool of capital. Gives brand recognition. Facilitates acquisitions in India. Provides an exit route for existing shareholders

2. Investors IDRs can lead to better portfolio management and diversification for investors by giving them a chance to buy into the stocks of reputed companies abroad.

Provides portfolio diversification to the investor Facility of ease of investment No need to know your customer (KYC) norms.
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No resident Indian individual can hold more than $200,000 worth of foreign securities purchased per year as per Indian foreign exchange regulations. However, this will not be applicable for IDRs which gives Indian residents the chance to invest in an Indian listed foreign entity. 3. Employees Foreign companies which do not have a listed subsidiary in India can give employee stock options (ESOPs) to the employees of their Indian subsidiaries through the IDR. This will enable the local employees to participate in the parent companies success. 4. Regulator IDRs will lead to more liquid capital markets and a continuous improvement in regulatory environment, thereby increasing transactional revenues for the regulator.

Standard Chartered Plc. Sole IDR in India

The first Indian Depository Receipt (IDR) was that of Standard Chartered Plc. which come into existence on May 13, 2010. This was done to boost the companys market visibility and brand perception in India. There was an issue of 240 million IDRs where every 10 IDRs represented one share of Stan Chart. The company is already listed on the London and Hong Kong stock Exchanges. Standard Chartered CEO Peter Sands is quoted in the Indian media as saying the IDR listing is to enhance Standard Chartereds commitment to India.

The Stan Chart IDR issue was opened for subscription on May 25, 2010 until May 28, 2010. Though the price band of the IDR was between INR 100 and INR 115, most of the bids were between INR 100 and INR 104. The bank issued 240 million IDRs including the anchor investors share of 36,000,000 IDRs. The total number of bids received at the NSE and the BSE were 312,025,000 and 137,680,000 IDRs, respectively, while the total number of bids received at cut-off price was 15,033,200.
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At the BSE, the IDR issue of Stan Chart was subscribed 2.2 times, while at the NSE, the issue was subscribed 1.53 times.

Problem faced by Standard Chartered: Problems faced by Standard Chartered during the issue as are given below: 1) The pricing and price movement in IDRs was directly linked to the share price of Stan Chart in the London Stock Exchange; this led to apprehension because any slowdown in the European economy would in turn affect the valuation of the bank, which would hamper its price movement in IDRs. 2) The two risks faced by Stan Chart were: Interest rate risk due to short term borrowing to fund long term assets; and Currency risk due to the strengthening of the US Dollar vis-a-vis local currencies in the countries of its presence. 3) Tax issues The IDRs opened at the Bombay Stock Exchange and National Stock Exchange on June 11. There is also problem related tax issue as to how it will be taxed.

Future Challenges of IDR in India

In spite of all the benefits, IDRs have not really taken off. Some of the reasons for this lack of interest in IDRs are: 1. Return on IDRs: What kind of returns would be made on the instrument of IDR it is not certain. 2. Stringent eligibility norms: The stringent eligibility criteria, disclosure and corporate governance norms, though in the investors interests, compare unfavorably with listing norms on other tier II global exchanges such as Luxembourg, Londons Alternate Investment Market and Dubai. This could result in higher compliance costs for mid-sized companies seeking to tap the Indian capital markets.
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3. No automatic fungibility: The GDR/ADR holders enjoy two-way fungibility option while investors in IDRs can exercise the option only after one year. Even after one year, retail investors are required to sell off the shares obtained by redemption in the foreign stock exchange where they are listed. 4. No Interest & exchange rate arbitrage opportunity: Two-way fungibility enables an investor to benefit from any arbitrage opportunities arising due to exchange rate fluctuations or quotation differences on the two stock exchanges. An IDR investor is denied of this opportunity. Also, the issuer is required to immediately repatriate the rupee funds through IDR proceeds back to the home country. By not allowing them to park their rupee funds in India, they cannot take advantage of any interest arbitrage opportunity. Also, given the fact that rupee is not a floating currency, it would entail conversion into dollars or other hard currency and then being repatriated. This would exert pressure on the rupee. 5. Lack of clarity on taxation issue: IDRs are not subject to securities transaction tax. Besides, dividends received by IDR holders will not be subject to dividend distribution tax. But, at present, exemption from long-term capital gains tax and concessional short-term capital gains are not available for secondary sales on the stock exchanges. However, the issue is expected to be resolved with the implementation of the Direct Tax Code. It is not clear whether IDRs are exempt from capital gains tax. According to the Section 10(38) of the Income-tax Act which exempts income arising from transfer of long-term capital asset being equity share or a unit of an equity-oriented fund on which securities transaction tax (STT) has been paid. Further short-term capital gains arising on transfer of equity shares in a company or a unit of an equityoriented fund are taxed at the concessional rate of 15%, plus applicable surcharge and education cess under section 111A of the Income-tax Act Based on the current provisions of Chapter VII of the Finance (No.2) Act, 2004, pertaining to STT, IDRs should not be subject to STT. Accordingly, the corresponding exemption from long-term capital gains tax under section 10(38) of the Income-tax Act and the concessional tax rate for short-term capital gains under section 111A of the Income-tax Act will not be available to IDR Holders on transfer of IDRs [17] There are no specific provisions regarding capital gains taxation of IDRs in the Companies Act or in the Income Tax Act, 1961. Therefore, the general rules

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relating to capital gains taxation apply and no benefits for long term holders of IDR. 6. Undersubscribed If they are not well marketed or fail to catch the imagination of investors so there is the possibility of IDR issues being undersubscribed?

Other constraints Insurance companies are not allowed to invest in IDRs. Another factor could be the lack of advertising of IDRs. . Any new product needs aggressive advertising to make it popular, which was overlooked by the Indian exchanges. The IDRs were not marketed aggressively by Indian exchanges. Depositary receipts like ADR, GDR have offices in various countries, and these offices market their instruments. Implementing these two changes will make the IDR a more popular instrument.

Dividend Distribution tax payable on dividend on IDRs Under the Income-tax Act, dividends declared by an Indian company (or any other company which has made the prescribed arrangement for the declaration and payment of dividends in India), shall be subject to a dividend distribution tax payable by the company. Such dividends shall then be exempt from tax in the hands of the shareholder under section 10(34) of the Income-tax Act. This exemption from dividend income under section 10(34) is not applicable to dividends paid to IDR Holders and accordingly, the dividends received by the IDR Holders in India shall be taxable in the hands of the IDR Holders.

Need of an IDR
The concept of the IDR is meant to diversify your holdings across regions to free from a region bias or the risk of a portfolio getting too concentrated in the home market. One has to study the firms financial condition before you buy its IDR so that one cannot be defrauded or misrepresented. Since these IDRs are listed, bought and sold on the Indian markets, the impact of global markets and exchange-rate risks are reduced, though not totally eliminated.
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Conclusion
IDRs are an important step towards the internationalization of the Indian security markets which would also be a possible benefit for the domestic investors in India. There are number of challenges as discussed above. To ensure the success of IDRs, India needs to first focus on a smaller region, and then move to the global market depending on its initial success. There are various obstacles prevent the issue of IDRs by foreign companies in India, such as tax issues, strict eligibility criteria. Indian laws relating to capital markets are highly comprehensive so this also one of the problems faced by the IDR. In order to attain the status of a favorable issuer destination, capital markets, especially emerging markets such as India, need to adopt issuer-friendly regulations, without compromising on investor protection. Strict regulations are required to a certain extent, in order to regulate the market. Though, this may lead to a decrease in the confidence of the issuers. So, capital markets should adopt a middle path wherein regulations are strong enough to ensure investor protection and do not deter issuer participation. Companies in India have reached out to the global equity markets in the past by issuing ADR and GDR .It now appears that it is high time for a role reversal. the Indian Depository Receipt (IDR) mechanism offers to overseas companies seeking to raise capital from the Indian stock markets .With the introduction of the IDR regime, not only it has advanced an additional avenue for foreign companies to raise capital in India, but also, an additional flexible route for Indian investors to invest in global corporations. So we can say that IDRs are an important step towards the globalization of the Indian security markets which would also be benefit for the investors in India. Now most of the amendments and clarifications are in place and with the clear-cut regulations/clarifications regarding taxation of IDRs, we hope that more companies would launch IDR issues and, thus, in the near future, IDRs will also become as famous as American Depository Receipt (ADR) or Global Depository Receipt (GDR).

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Annexure A-1

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A-2 : As per Companies Rules

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A-3 : As per SEBI Regulations

A-4 : Other Conditions

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Bibliography
1.Indian Financial System By Vasant Desai 2. Indian Depository Receipts - A New Beginning A publication by PWC http://www.pwc.in/en_IN/in/assets/pdfs/publications-2010 3. Overview - Indian Depository Receipts - KGC Consulting http://www.kgcindia.com/publication 4.Standard Chartered Press Release http://www.standardchartered.co.in/mediacentre/pdf/2010_25_may_standard_chartered_plc.pdf

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