“Indian Depository Receipt (IDR) is a financial 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.”
The foreign companies deposit their shares in the Indian depository receipts, which then issues the receipts to potential investors, as against for shares. This benefits the shareholders, who enjoy the profits derived out of the dividends or by way of bonuses.
The Companies (Issue of Indian Depository Receipts) Rules, 2004, as enacted by the Central Government, in accordance to Section 605A of the Companies Act, aided the formulation in this regard, under which, IDRs can be purchased by any person residing in India. Further, the guidelines issued by the Securities and Exchange Board of India (SEBI), notified the general public about the listing agreements to be entered between exchange and the foreign issuer specifying continuous listing requirements.
Since this step was undertaken in order to attract the attention of the global market, there were certain Guidelines levied in the eligibility of these foreign companies. They are:
According to the guidelines issued by the Securities and Exchange Board of India, the issue of IDRs to the general public will follow the same process as that of the domestically issued shares, where the listed company will make the public offer and the residents can bid for the shares thereon. The Issue Process is exactly the same:
i. The company will file a draft red herring prospectus (DRHP), which will be examined by SEBI.
ii. “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.”
iii. After SEBI gives its clearance, the company sets the issue dates and files the document with the Registrar of Companies.
iv. After the approval given by the ROC, the issuing company then is allowed to opt for marketing of the issue. The issue will be floated for a fixed number of days and requires the investors to submit their applications within this stipulated period.
v. Bidding will take place within a price limit constrained by lower and upper limits and the issue price will then be determined after the closing of the issue.
vi. The depository receipts will then be allocated to the investors in their “DEMAT” account, in an electronic format, as laid down by the SEBI, and hence, the process of issue of shares to the general public is essentially similar to that of the domestic issue.
C. BENEFITS OF IDRs
Benefits to the Issuing Company:
a. Larger Pool of Capital: India, being a populous nation, provides for one the largest consumer markets in the world. This attracts foreign investments to cater the larger pool of potential capital.
b. Recognition: India, as stated above, being populous, provides for a global recognition to the foreign investments, as an established market allows for greater trade and consequent growth.
c. Acquisition: Comparative analysis allows for significant valuation of domestic companies, which then, in order to compete with their foreign counterparts, allows the moulding of financial strategies, such as mergers or such, to economically prosper.
d. Returns: Since these are not debt instruments, assured returns are not a guarantee. This allows flexibility in distribution of profits and relaxes the stress of distributions.
e. Accessibility: Indian markets provide for established investor base, which allows the companies, of foreign origin, to seamlessly and reliably invest in it.
f. Market Intermediaries: Since an authorised institution, such as SEBI, is a regulator of IDRs, reliability, as a factor, becomes solid and develops trust for the markets.
Benefits to the Investors:
a. Portfolio Diversification: Since IDRs provide for investment opportunities in the foreign issuing companies, it aids in diversifying the portfolio of the domestic investors.
b. Active Participation: Foreign Participation, followed by portfolio diversification and regulated transactions stimulate active participation in the community.
c. Investments: Since IDRs are legally recognised, they act as significant investment opportunities for the investors.
d. Investor Rights: Since the foreign investment companies have to comply with the domestic norms, the rights of the domestic investors are primarily and unconditionally guaranteed.
e. IOSCO Standards: The International Organisation of Securities Commissions helps in global recognition and legitimization of the issuing company as well as the general security of the rights of the investors.
D. CONCLUSION
Depository Receipts are an example of financial engineering activity, which can be used for enhancement of capital resources. By identifying the needs of the issuers and the investors, the knowledge regarding associated tasks becomes accessible and this accessibility helps in the financial engineering to shape an asset, in such a form, which suits the requirements and draws attention. With the IDRs in the picture, the global economy now becomes more diverse with regards to its potential markets and subsequent financial planning.
The only key difference that arises in the issuance of the shares of the foreign company is with regards to its listing under the SEBI. As specified under Rule 13 of the 2014 Rules, the specifications are to be met and only on the compliance will the SEBI allow for IDRs.
E. BIBLIOGRAPHY
– SITES REFERRED
1. www.nseindia.com
2. https://the-international-investor.com
3. https://depositaryreceipts.citi.com
4. https://rbi.org.in