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Indian Depository Receipts

Despite interest in IDRs as a viable fund-raising option, issuers have been reluctant to engage in the actual process of issuing them. The onerous nature of the eligibility norms has made it possible only for large corporations

Indian Depository Receipts (IDRs) are instruments denominated in Indian rupees. Like all other depository receipts, such as Global Depository Receipts (GDRs) and American depository receipts (ADRs), they are negotiable financial instruments, issued by a local depository on the basis of equity shares of a foreign company that is listed in the issuing company's country.

Primarily, any issuance of securities India, whether by way of a public offer or otherwise is governed by the Companies Act 1956 and until recently, the Sebi (Securities and Exchange Board of India) (Disclosure and Investor Protection) Guidelines 2000 (Dip Guidelines). Section 605A of the Act was introduced in 2000, authorising the central government to regulate the issue of IDRs by a company incorporated outside India, pursuant to which the Companies (Issue of Indian Depository Receipts) Rules 2004 were framed. The Rules set out the regulatory requirements governing an IDR issue, and paved the way for listing of foreign companies on Indian stock exchanges. In 2006, Sebi also introduced a new Chapter VIA to the Dip Guidelines firming up the disclosure requirements in relation to IDR issuances. Typically, the offshore issuer may list on an Indian stock exchange through the issue of depository receipts by a domestic depository. This is done on the basis of underlying shares being deposited with a custodian in the issuer's jurisdiction on behalf of the depository, by the company.

Despite the existence of a legal structure and significant market curiosity on IDRs as a viable fund-raising option, issuers have been reluctant to engage in the actual process of issuing them. The key reason being the onerous nature of the eligibility norms, which made it possible for only large corporations to issue IDRs. Given that such corporations would in any event prefer to tap their own robust markets, the need to approach Indian investors is yet to surface. Therefore, 2009 saw the introduction of various amendments to the IDR legal framework, in an attempt to make it a lucrative opportunity for foreign companies.

Through an amendment to the Rules on April 15 2009, the Ministry of Corporate Affairs (MCA) relaxed the requirement of submitting an interim audit report, by issuer companies based in a jurisdiction which requires statutory audit for the gap between the date of the latest disclosed audited financial statements and the date of issue-opening, where the gap is less than 180 days. However, where the issuer is a bank incorporated outside India and regulated by a member of the Bank for International Settlement or a member of the International Organization of Securities Commissions (Iosco), such interim financial statements could be based on a limited review report by their statutory auditor.

On June 9 2009 Sebi permitted mutual funds to invest in IDRs subject to guidelines contained in the Sebi (Mutual Funds) Regulations 1996.

Further, on June 16 2009 a simplified Model Listing Agreement was notified for issuers based in Iosco jurisdictions, permitting them to follow their home country standards on corporate governance and disclosure of periodical results. This is provided that the IDR holders are treated at par with shareholders in the issuer's home country.

On June 19, vide Sebi (Facilitation of Issuance of Indian Depository Receipts) (Amendment) Regulations, the scope of dealing in IDRs was extended to custodians, depositories, and foreign institutional investors (FIIs) through amendment in the respective regulations.

To align its regulatory framework with that of the MCA and Sebi, on July 22 2009, the RBI (Reserve Bank of India) inter alia, permitted IDRs to be issued to FIIs and non-resident Indians. In addition to this, the RBI also prohibited automatic fungibility of IDRs and provided for a lock-in of one year from the date of issuance, prior to redemption. Further, RBI has directed that proceeds of the issue should be repatriated outside India immediately by the issuer. International financial or banking companies having a presence in India were permitted to issue IDRs only with prior regulatory approval.

On July 31 2009, Sebi amended Chapter VIA of the Dip Guidelines by issuing comprehensive clarifications in relation to the accounting standards, disclosure requirements and allocation process for IDRs.

In August and September this year the substitution of the Dip Guidelines with the newly notified Sebi (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR Regulations), Chapter VIA has now been replaced by Chapter X and primarily supplemented by Schedule XIX. Whilst this has not effected any significant change to the existing IDR laws, in keeping with the entire scheme of ICDR Regulations, Chapter X has been drafted more accurately.

Despite these significance developments, there still remain various open issues, including tax treatment of the IDRs, which will require considerable regulatory clarity. In the absence of any precedents to draw on, it will be interesting to the evolution of IDRs and the extent of foreign corporate interest in raising funds in India and capitalising on the India growth story.

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