“Depository Receipts in India: With a Special Reference to

Indian Depository Receipts”

(As Published in Lex-Warrier Law Journal (ISSN 2319-8338), February
2013)

Nikhil Rajpurohit

Abstract
Depository Receipt is one of the effective means to increase global trade. It is
beneficial for both, the investors and the companies, because investors get the
opportunity to hold the share in the equity of other countries, whereas companies get
the opportunity to raise the capital from the world market. Because of the flexibility in
their conversion and wider market, American Depository Receipts (ADRs) and Global
Depository Receipts (GDRs) have proved to be effective sources for raising finance
for global Companies as well as Indian Companies. Indian Depository Receipt (IDR)
is created by the Indian depository in India against the underlying equity shares of the
issuing company. With the IDR, Just as ADRs and GDRs, foreign companies can now
issue their shares to nationals in India. But still, even till now, Indian Depository
Receipt has not been able to create an ideal market for itself. This is because of tighter
norms for both, the investors and the companies, also the current norms provide for
only a limited flexibility in conversion of shares. There is a need of liberal and
flexible norms to encourage the foreign investors.


The author is a final year law student. Currently He is pursuing his B.A. L.L.B. (Hons.) from Institute
of Law, Nirma University, Ahmedabad, Gujarat. Email: nikhilraj1990@gmail.com.
 Introduction:
Depositories came into being in India only after the enactment of Depositories Act
1996. The act paved the way for establishment of NSDL (National Securities
Depositories Limited), the first depository in India. NSE joined hands with leading
financial institutions to establish the NSDL, with the objective of enhancing the
efficiency in settlement systems and also to reduce the menace of fake, forged and
stolen securities. The second depository in the country, CDSL (Central Depositories
of Securities Limited), promoted by BSE and a few commercial banks, was granted
certificate of commencement of business in February 1999. This ushered in an era of
dematerialized trading and settlement of securities. SEBI has made dematerialized
settlement mandatory in an ever-increasing number of securities in a phased manner,
thus bringing about an increase in the proportion of shares delivered in dematerialized
form. Today, more than 99% of settlement of securities takes place in dematerialized
form. In the depository system, securities are held in depository accounts which are
more or less similar to holding funds in bank accounts. Transfer of ownership of
securities is done through simple account transfers.1

This method does away with all the risks and hassles normally associated with
paperwork. Consequently, the cost of transacting in a depository environment is
considerably lower as compared to transacting in certificates. The introduction of
depository system has brought a revolutionary change in the way the market operates.
Trading for investors, both institutional and individuals has become very convenient
and hassle free. The capital market reforms have also made the market lucrative for
public companies to raise capital. But still a lot needs to be done if we want our
markets to become efficient and investor friendly.2

Depository Receipt:
1
Vinay K. Srivastava, Depositories in Indian Capital Market, Advances In Management Vol. 4 (5), 6,
May (2011).
2
Srivastava, Id.
A depositary receipt (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, which is issued by a foreign publicly listed company. The DR, which is a
physical certificate, allows investors to hold shares in equity of other countries. One
of the most common types of DRs is the American depositary receipt (ADR), which
has been offering companies, investors and traders global investment opportunities
since the 1920s. Since then, DRs have spread to other parts of the globe in the form of
global depositary receipts (GDRs) (the other most common type of DR), European
DRs and international DRs. ADRs are typically traded on a U.S. national stock
exchange, such as the New York Stock Exchange (NYSE) or the American Stock
Exchange, while GDRs are commonly listed on European stock exchanges such as the
London Stock Exchange. Both ADRs and GDRs are usually denominated in U.S.
dollars, but can also be denominated in Euros.3

How does it work?

The DR is created when a foreign company wishes to list its already publicly traded
shares or debt securities on a foreign stock exchange. Before it can be listed to a
particular stock exchange, the company in question will first have to meet certain
requirements put forth by the exchange. Initial public offerings, however, can also
issue a DR. DRs can be traded publicly or over-the-counter.4

The Benefits of Depositary Receipts:

The DR functions as a means to increase global trade, which in turn can help increase
not only volumes on local and foreign markets but also the exchange of information,
technology, regulatory procedures as well as market transparency. Thus, instead of
being faced with impediments to foreign investment, as is often the case in many
emerging markets, the DR investor and company can both benefit from investment
abroad.5

For the Company:

3
Reem Heakal, An Introduction To Depositary Receipts, INVESTOPEDIA, (July 24
2011) http://www.investopedia.com/articles/03/091003.asp.
4
Heakel, Id.
5
Heakel, Id.
A company may opt to issue a DR to obtain greater exposure and raise capital in the
world market. Issuing DRs has the added benefit of increasing the share's liquidity
while boosting the company's prestige on its local market ("the company is traded
internationally"). Depositary receipts encourage an international shareholder base, and
provide expatriates living abroad with an easier opportunity to invest in their home
countries. Moreover, in many countries, especially those with emerging markets,
obstacles often prevent foreign investors from entering the local market. By issuing a
DR, a company can still encourage investment from abroad without having to worry
about barriers to entry that a foreign investor might face.6

For the Investor:

Buying into a DR immediately turns an investors' portfolio into a global one.
Investors gain the benefits of diversification while trading in their own market under
familiar settlement and clearance conditions. More importantly, DR investors will be
able to reap the benefits of these usually higher risk, higher return equities, without
having to endure the added risks of going directly into foreign markets, which may
pose lack of transparency or instability resulting from changing regulatory
procedures. It is important to remember that an investor will still bear some foreign-
exchange risk, stemming from uncertainties in emerging economies and societies. On
the other hand, the investor can also benefit from competitive rates the U.S. dollar and
euro have to most foreign currencies.7

Types of DRs:
- ADR (American Depository Receipt),
- GDR (Global Depository Receipt),
- IDR (Indian Depository Receipt),
- LDR (Luxembourg Depository Receipt),
- EDR (European Depository Receipt).
In United Kingdom, CREST Depositary Interests (CDIs) function similarly, but not
identically to depositary receipts.8
An overview of ADR and GDR:

6
Heakel, supra note 3.
7
Heakel, Id.
8
Depository Receipt, WIKIPEDIA, http://en.wikipedia.org/wiki/Depositary_receipt, (last updated
November 30, 2012).
An integration of world financial market has been the distinct feature of the recent
global development. The last two decades has witnessed acceleration in financial
globalization represented by an increase in cross-country foreign assets.
Technological progress and the liberalization of capital flows have fostered
considerable competition among global stock exchanges for equity listings and trades.
Cross-border listings have gained in importance over the past few decades as many
companies have become more international in their orientation. The reason why so
many firms recently list their shares for trading on more than one stock exchange is a
segmentation of capital markets. It is usually expected that a Depository Receipts
(DR) listing improves liquidity of the company’s stock, as the potential investors’
base is extended, the visibility of the company both in DR and local markets is
enhanced, and cross border trading is enabled. International listings provide firms
with improved access to global capital, reduced risk exposure, enhanced visibility,
liquidity and investor base.9

If the depository receipt is traded in the United States of America (USA), it is called
an American Depository Receipt, or an ADR. If the depository receipt is traded in a
country other than USA, it is called a Global Depository Receipt, or a GDR. It
represents a certain number of underlying equity share. ADRs and GDRs are not for
investors in India—They can invest directly in the shares of various Indian
companies. But the ADRs and GDRs are an excellent means of investment for NRIs
and foreign nationals wanting to invest in India. By buying these, they can invest
directly in Indian companies without going through the hassle of understanding the
rules and working of the Indian financial market—since ADRs and GDRs are traded
like any other stock. NRIs and foreigners can buy these using their regular equity
trading accounts. Though the GDR is quoted and traded in dollar terms, the
underlying equity shares are denominated in rupees. GDR is issued through the under
writers, who arrange to sell the GDR to the investors. After the final issue, a
depository is chosen, and the company registers the equivalent equity shares of GDR
issue in the name of this depository. Though the shares are registered in the name of
ythis depository, the physical possession of the shares is with the local custodian, who
acts as the trustee of the depository. The depository subsequently issues the GDR to

9
Naliniprava Tripathy, Indian Stock Market Reaction To International Cross-Listing: Evidence From
Depository Receipts, China-USA Business Review October 2010, Volume 9, 1, No.10.
the under-writer who distributes these negotiable instruments to the investors. So it is
evident that the Indian capital market has remarkably changed through the issue of
GDRs and able to mobilize considerable foreign investment. The capital market has
become very active, and Financial Institutions (FIs), FIIs, Asset management
companies have shown increasing interest in investing in India. With a view to
achieve the goal, Euro-issue is taken as one of the viable alternatives. GDR is
envisaged as an innovative and easily accessible route to reach the international
capital market by Indian corporate sector. The response of foreign investment flows to
reforms was to a great extent encouraging. It clearly shows that the sizes of euro-
issues have grown tremendously just after new economy policy measures announced.
A GDR is a dollar denominated instrument listed and traded on foreign stock
exchanges like NYSE (New York Stock Exchange) or NASDAQ (National
Association of Securities Dealers Automated Quotation) both. The Reliance Industries
Ltd, in May 1992, made the first GDR issue of $150 million. The first Indian GDR
issues made by Reliance Industries and Grasim Industries were at a premium. There
are 22 ADR issues from India between 2004 and 2009. 10 Since ADRs are traded in the
U.S. market they have been considered as an alternative to such cross-border
investments while ensuring a higher diversification benefits.11

Conversion:
GDRs can be converted into ADRs by existing GDRs and depositing the underlying
equity shares with the ADR depository in exchange for ADRs. The company has to
comply has to comply with the SEC (Securities and Exchange Commission of U.S.)
requirements to materialise this exchange offer process. However, the company does
not get any funds from this conversion. The trend is towards the conversion of GDRs
into ADRs as ADRs are more liquid and cover a wider market.12
Genesis of Depository Receipts - Indian Experience:
Starting with the maiden issue of the Reliance Industries in May 1992, around 81- odd
Indian companies have so far tapped the global market with a cumulative mobilization
of Rs 37,417.35 crore by the end of 2001-02 through 115 issues. Indeed, India has the

10
Tripathy, supra note. 9, at 3-4.
11
Kabir, M. Humayun; Maroney, Neal; and Hassan, M. Kabir, International Diversification with
American Depository Receipts (ADRs), (2005), Department of Economics and Finance Working
Papers, 1991-2006. Paper 38, 5, http://scholarworks.uno.edu/econ_wp/38
12
Bharati V. Pathak, Indian Financial System: Markets, Institutions and Services 153 (2nd ed. 2010),
distinction of issuing the maximum number of DRs among the emerging economies.
The genesis of Indian multinational corporations (MNCs) with not only international
operations, but also a global ownership is a logical fallout of this process. While
bunching of DR issues took place in the early 1990s possibly in view of the pent-up
overseas demand for Indian papers, it seemed to have been primarily motivated by the
existing costly procedure of floatation in the domestic market. Initially GDR was the
preferred mode with the majority of listings in the Luxembourg or the London Stock
Exchange in view of their less stringent disclosure requirements vis-a-vis the
requirements under the US GAAP (Generally Accepted Accounting Principle).
Besides, a majority of the Indian GDRs were issued pursuant to the US Rule 144A
and/or Regulation S of the Securities Exchange Commission, which enabled their
trading in the US market too mainly through the PORTAL system. Nevertheless, A
DR has since emerged as the star attraction thanks to its higher global visibility,
particularly for the new-economy stocks, with nine issues listed in NYSE and three
issues in Nasdaq so far. While the ownership pattern of Indian GDR/ADR is not clear,
both individual and foreign ownerships were in general found to be higher in London
than in the US as per the Paris-based World Federation of Exchanges (FIBV) Survey
(1999). Initially, companies seeking to float DRs were required to obtain prior
permission from the department of economic affairs, ministry of finance, the
government of India (GoI). To be eligible, companies should have a consistent track
record of good performance for a minimum period of three years. The infrastructure
companies were exempted from the latter requirement in June 1996. The restrictions
on number of DR issues were also removed in June 1996. The Euro issue proceeds
were subject to a number of end-use restrictions modified from time to time before
their withdrawal in May 1998. However, such proceeds were not to be invested in
stock market and real estate. In December 1999 Indian software companies, in March
2000 other knowledge-based companies, and in April 2001 all types of companies
were permitted to undertake overseas business acquisition through ADR/GDR stock
swap. In January 2000, companies were made free to access the GDR/ADR market
through an automatic route operated by the RBI, without the prior approval of the GoI
or the track record condition.13

13
Sanjay K. Hansda and Partha Ray, Stock Market Integration and Dually Listed Stocks: Indian ADR
and Domestic Stock Prices, Vol. 38 Economic and Political Weekly, No. 8, Money, Banking and
Finance (Feb. 22-28, 2003), 742-743.
In March 2001, the government allowed two-way fungibility for Indian GDRs/ADRs
by which converted local shares should be reconverted into GDRs/ADRs subject to
sectoral caps. With this, the reverse fungibility of ADRs and GDRs has gathered
momentum. With the reconversions, there was no headroom in case of the ICICI
bank’s counter in September 2002. Headroom denotes the number of domestic shares
which are available for reconversion into ADRs or GDRs.14The Private non-financial
companies mobilised Rs 11,352 crore from the international markets during 2005-06
which was 238.7 per cent higher than the previous year. Out of these, Rs 9779 crore
was mobilised though GDRs, Rs 1,573 crore through ADRs and Rs 6 crore through
ECCBs.15
Indian Companies prefer ADRs:
ADRs are accessible to only good companies with high transparency and good
governance practices which also benefit the local investor; this gets reflected in a
higher P/E ratio. Companies are attracted towards raising ADRs as they are free to
decide the deployment of funds either in the US or in India. Companies can also make
their presence felt in the global arena which would result in increased liquidity of the
company’s stock. This would also further broaden the mergers and amalgamation
financing capabilities of the company. Moreover, an ADR issue creates a currency for
issue of dollar-denominated stock option to employees, thereby enabling the company
to hire and retain the best human resources.16

What is an Indian Depository Receipt?

According to 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. Just as Indian
companies tap foreign capital markets to raise funds, similarly, foreign companies can
now issue their shares to nationals in India. To enable Indian investors to diversify
risk and as a step towards integration of the Indian capital market with the
international capital markets, foreign companies are allowed to access the Indian
capital market by issuing Indian depository receipts (IDRs). In 2002, the Companies

14
Pathak, supra note 12, at 155.
15
Pathak, Id., at 158.
16
Pathak, Id.
Act was amended to allow the foreign companies to offer shares in the form of
depository receipts in India.17

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
IDRs.18

A foreign company issues and deposits new shares with an Indian depository (say,
National Securities Depository Ltd (NSDL) or Central Depository Service Ltd or
CDSL), such a depository then, in turn, issues equivalent shares in rupees to investors
in India. This is exactly the same way Indian companies like Infosys, Reliance and
ICICI Bank raised money through Global Depository Receipts (GDRs) or American
Depository Receipts (ADRs) in the past from global markets. India is just replicating
this model to provide a window to global corporations to raise money from India and
list on the domestic bourses.19

Legal and regulatory framework:

The Ministry of Corporate Affairs, in exercise of powers available with it under
section 642 read with section 605A had prescribed the “Companies (Issue of Indian
Depository Receipts) Rules, 2004 (IDR Rules)” vide notification number GSR 131(E)
dated February 23, 2004. These Companies rules provide for (a) Eligibility for issue
of IDRs (b) Procedure for making an issue of IDRs (c) Other conditions for the issue
of IDRs (d) Registration of documents (e) Conditions for the issue of prospectus and
application (f) Listing of Indian Depository Receipts (g) Procedure for transfer and
redemption (h) Continuous Disclosure Requirements (i) Distribution of corporate
benefits.20

17
Pathak, Id., at 158-159.
18
Indian Depository Receipts (IDRs), BANKINGUPDATE
http://www.bankingindiaupdate.com/idr.htm, last updated March 20, 2012.
19
Anand Adhikari, Indian Depository Receipts, Business Today, May 30, 2010, 26.
20
Indian Depository Receipt, WIKIPEDIA, http://en.wikipedia.org/wiki/Indian_Depository_Receipt,
(last updated March 20 2012).
These rules were operationalised by the Securities and Exchange Board of
India (SEBI)—the Indian markets regulator in 2006. Operation instructions under
the Foreign Exchange Management Act were issued by the Reserve Bank of India on
July 22, 2009. The SEBI has been notifying amendments to these guidelines from
time to time.21

Eligibility of companies to issue IDRs:

The regulations relating to the issue of IDRs are contained within “Securities and
Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009”, which get revised from time to time. The regulations were lastly
updated till Oct.12, 2012. According to Clause 26 in Chapter III (“Provisions as to
public issue”), the following are required of any company intending to make a public
issue in India:
 it has net tangible assets of at least Indian Rupee three crore in each of the
preceding three full years (of twelve months each), of which not more than
fifty per cent are held in monetary assets
Provided that if more than fifty percent of the net tangible assets are held in
monetary assets, the issuer has made firm commitments to utilise such excess
monetary assets in its business or project; Provided further that the limit of
fifty percent on monetary assets shall not be applicable in case the public offer
is made entirely through an offer for sale.
 it has a minimum average pre-tax operating profit of rupees fifteen crore,
calculated on a restated and consolidated basis, during the three most
profitable years out of the immediately preceding five years.
 it has a net worth of at least INR one crore in each of the preceding three full
years (of twelve months each);
 the aggregate of the proposed issue and all previous issues made in the same
financial year in terms of issue size does not exceed five times its pre-issue net
worth as per the audited balance sheet of the preceding financial year;
 if it has changed its name within the last one year, at least fifty per cent. of the
revenue for the preceding one full year has been earned by it from the activity
indicated by the new name.
21
RBI/2009-10/106 A.P. (DIR Series) Circular No. 05, Issue of Indian Depository Receipts, RESERVE
BANK OF INDIA, http://rbidocs.rbi.org.in/rdocs/Notification/PDFs/APDIR5220709.pdf (last updated
July 22, 2009).
Chapter X of the regulations deals with issue of IDRs. Under the chapter there is
Clause 96 to 106. Clause 97 provides for additional requirements from a foreign
company intending to make an issue of IDRs:
“An issuing company making an issue of IDR shall also satisfy the following:
 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 with securities market
regulations in its home country.
Explanation: For the purpose of this regulation, the term ‘home country’ means the
country where the issuing company is incorporated and listed.”

IDRs issue process

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 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 Registrar’s 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.22

22
SEBI Doubles Retail Limit, Tightens IPO Norms, REDIFF,
http://business.rediff.com/report/2010/oct/26/sebi-tightens-ipo-norms.htm (last updated Oct. 26 2010).
 Why Will They Come to India?
It’s a good way for foreign companies to raise capital in India, as more investors flock
to the equity markets on the back of an economy that is likely to grow at over eight
per cent. A listing here not only strengthens its brand presence, but also shows its
commitment to India.23

What’s for the Investors?

It’s an opportunity for Indian investors to take advantage of the growth opportunity in
a global corporation. The shares can be bought and sold like any other on the Indian
markets but come without voting rights. Investors can claim dividends and capital
appreciation.24

Does It Make Sense to Invest?

Not for small investors, as any investment in an overseas company requires research
on its parent company and operations elsewhere. For instance, Standard Chartered’s
Indian operation reported profits of $1 billion in 2009, but this accounts for just 20 per
cent of its global profit. In addition, investors also have to track the prices of the
parent’s share on global bourses where they are listed or in their home country.25

Listing a company’s stock abroad should have no impact on its price when domestic
and foreign equity markets are fully integrated. If barriers exist, however, a firm’s
share value may be affected by the cross-listing announcement.26

Fungibility:
A term called "Fungibility" is used for these IDR's, now what does this means & how
it relates to IDR/ADRs? The actual meaning of the word fungible is the ability to
substitute one unit of a financial instrument for another unit of the same financial
instrument. However, in trading, fungibility usually implies the ability to buy or sell
the same financial instrument on a different market with the same end result.
Its a financial instrument (i.e. individual stock, futures contract, options contract, etc.)
is considered fungible if it can be bought or sold on one market or exchange, and then

23
Adhikari, supra note. 19.
24
Adhikari, Id.
25
Adhikari, Id.
26
Tripathy, supra note 9, at 10.
sold or bought on another market or exchange. For example, if one hundred shares of
an individual stock can be bought on the NASDAQ in the US, and the same one
hundred shares of the same individual stock can be sold on the London Stock
Exchange in the UK, with the result being zero shares, the individual stock would be
considered fungible. There are many fungible financial instruments, with most
popular being individual stocks, some commodities (e.g. gold, silver, etc.), and
currencies.27

Fungible financial instruments are often used in arbitrage trades, because the
difference in the price (the arbitrage part) often comes from a difference in location
(the fungible part). For example, if the Euro to US Dollar exchange rate was 1.2500 in
the US and 1.2505 in the UK, an arbitrage trader could buy Euros in the US, and then
immediately sell Euros in the UK, making a profit of 0.0005 per Euro (or $5 per
€10,000), because Euros are a fungible financial instrument. Similarly it implies to
Stocks IDRs etc.28

Legal framework for fungibility:

Rule 10 of Companies (Issue of Indian Depository Receipts) Rules, 2004:-
“Procedure for Transfer and redemption of IDRs:-
A holder of IDRs may transfer the IDRs or may ask the Domestic Depository to
redeem these IDRs, subject to the provisions of the Foreign Exchange Management
Act, 1999 and other laws for the time being in force.”

RBI’s circular dated July 22, 2009:-

“Fungibility:-
Automatic fungibility of IDRs is not permitted.
Period of redemption:-
IDRs shall not be redeemable into underlying equity shares before the expiry of one
year period from the date of issue of IDRs.”

Regulation 100 of Chapter X of SEBI (ICDR) Regulations, 2009:-

27
Bhavik Shah, Fungibility And Standard Chartered IDRs, RAREINDIANSHARES
http://www.rareindianshares.info/2012/03/fungibility-and-standard-chatered-idrs.html, (last updated
March 18, 2012).
28
Shah, Id.
“IDRs shall not be automatically fungible into underlying equity shares of issuing
company.”

Provision of Two-way fungibility

With the objective of encouraging greater foreign participation in Indian capital
market, in the Budget-2012, the Finance Minster Pranab Mukherjee allowed two-way
fungibility of Indian Depositary Receipts.29 This would enable more foreign firms to
list and issue their shares in India. Accordingly, RBI and SEBI, by circulars dated 28 th
August, 2012, have approved partial conversion of IDRs into equity shares late in
August, while capping the funds to be raised through IDRs at USD 5 billion. As per
the SEBI Circular:
"... to retain the domestic liquidity, it is decided to allow partial fungibility of IDRs
(i.e. redemption/ conversion of IDRs into underlying equity shares) in a financial year
to the extent of 25 per cent of the IDRs originally issued,"

By a Ministry of Corporate Affairs (MCA) notification (dated Oct. 1, 2012) in official

gazette, Government has amended the Companies (Issue of Indian Depository
Receipts) Rules, 2004 to permit part-conversion of securities into equity shares by
investors.
As per the Ministry of Corporate Affairs notification, "A holder of IDRs may transfer
the IDRs, may ask the domestic depository to redeem them or, any person may seek
re-issuance of IDRs by conversion of underlying equity shares," subject to the
provisions of Foreign Exchange Management Act and SEBI rules at the time.

The two-way fungibility allowed for IDRs is similar to the limited two-way flexibility
allowed for ADRs and GDRs issued by domestic companies in foreign markets. This
would enable Indian shareholders to convert their depository receipts into equity
shares of the issuer company and vice versa. The restrictions on fungibility was seen
as one of the major factors for foreign entities keeping away from listing their IDRs.
So far, only foreign company, UK-based banking major Standard Chartered, has listed
its IDRs in India. SEBI had said it decided to prescribe a frame work for two-way

29
Anita Bhoir, Budget 2012: Standard Chartered Rises To 20% On IDR Fungibility Announcement,
THE ECONOMIC TIMES, March 16, 2012,
http://articles.economictimes.indiatimes.com/2012-03-16/news/31201207_1_fungibility-idrs-standard-
chartered.
fungibility of IDRs to improve the attractiveness and long-term sustainability of such
instruments.30
Taxation Implications:
The good news is that IDR does not come under the purview of Securities Transaction
Tax. But the IDR holder will have to pay tax on the dividend income earned. It is not
yet clear whether the tax payable would be equal to the Dividend Distribution Tax
which for the current fiscal stands at 16.61%. So tax seems sure but the rate is yet
unsure. Currently, Long term gains made from Indian Stock Exchanges (stock held for
more than 12 months) is completely exempted from tax while Short term capital gains
tax (held less than 12 months) stands at 15%. But the IDRs does not fall under the
STT, so maybe it will not enjoy the same benefits as the shares listed on the Indian
Exchanges enjoys. So this means that IDR’s will be taxed like any other asset –long
term tax- held for over 36 months would be around 20%. Short term tax, when asset is
held for less than a year, will be like regular income earned, at 30.9%.31

Indian investors need to consider the tax implications of investment in the IDRs.
While Section 605A of the Companies Act, 1956 (the “Companies Act”) discusses
IDRs, 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 relating
to capital gains taxation apply and no benefits for long term holders of IDRs (i.e. if
the Securities Transaction Tax is paid, there is no capital gains tax on long term
holders of listed securities) are available. It is possible that the upcoming “Direct Tax
Code” may clarify the issue but as of now the capital gains tax treatment of IDRs is
not favorable.32

“Standard-Chartered” – first foreign Company to Issue IDRs:

Standard Chartered is the first and currently, the only company with depository
receipts in India, where 10 IDRs equalled one share in the London-based Standard
Chartered bank. Even though Standard Chartered Plc was successful in raising

30
Government Amends Rules To Allow IDR Conversion Into Shares, THE ECONOMIC TIMES, Oct 8,
2012, http://articles.economictimes.indiatimes.com/2012-10-08/news/34323045_1_indian-depository-
receipts-idr-conversion-fungibility.
31
Bhavik Shah, What Does IDR Means To An Indian Shareholder in Terms of Taxation, (May 17 2012)
http://www.bhavikkshah.blogspot.in/2010/05/what-does-idrs-means-to-indian.html.
32
Indian Depository Receipts, LEXVIDHI, http://www.lexvidhi.com/article-details/indian-depository-
receipts-302.html, (last updated March 22, 2012).
nearly Rs. 25bn IDR sales in May 2010, the buyers of the IDR were not as lucky as
the receipts have traded at a tremendous discount to their underlying shares. Experts
believe that foreign players would only be keen on issuing IDRs when Standard
Chartered IDRs trade at par with their foreign shares. 33 But, as the limited two-way
fungibility has been allowed, situation has changed, which is evident with the
announcement of Interim Dividend by Standard Chartered on its IDRs.34

Conclusion:
Generally, depository receipt is one of the ways for the investor to buy shares in a
foreign company and also it is also beneficiary for the company because it doesn’t
have to leave its home state. ADRs and GDRs have proved it well. Also, the Indian
companies are not behind in utilising the DRs. But IDR has failed to make an ideal
33
Standard Chartered IDR Extends Friday’s Gains, INDIAINFOLINE,
http://www.indiainfoline.com/Markets/News/Standard-Chartered-IDR-extends-Fridays-
gains/5378168796, (last updated March 19, 2012).
34
See: StanChart announces interim dividend of Rs 1.34 per IDR, THE ECONOMIC TIMES, (Oct 1,
2012) http://articles.economictimes.indiatimes.com/2012-10-01/news/34199687_1_indian-depository-
receipt-stanchart-s-idr-idr-holders.
market for itself, which is evident from the fact that till now, only one foreign
company has issued IDRs. Besides Standard Chartered, no company has come
forward to raise capital through IDRs. This is due to, previous absence of two-way
fungibility, prohibition on insurance companies from investing in IDRs and lack of
clear and specific tax implications.

As the two-way fungibility is allowed, it is an indicator that we are on the path of

allowing full convertibility. Regarding taxation, the implications are hope to made
cleared by Government the wake of the changing scenario or by the Direct tax Code.

So, it is clear that the market of the IDRs is not fully developed and if we want to
develop it, if we want to encourage the shareholder base, there is a strong need to
modify the framework to facilitate the issue of IDRs.

References:
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4 (5) May (2011).
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26 2010).
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gains/5378168796, (last updated March 19, 2012).
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depository-receipt-stanchart-s-idr-idr-holders.