Indian Depository Receipt

An Indian Depository Receipt (IDR) is a financial instrument used by foreign companies to raise capital and trade their shares in the Indian stock market. It represents the ownership of shares in a foreign company but is denominated, listed, and traded in Indian Rupees (INR).
Essentially, an IDR allows Indian investors to invest in the equity of foreign companies without dealing with foreign exchanges or currencies, while foreign companies gain access to India’s capital markets.

Definition and Concept

An Indian Depository Receipt (IDR) is a negotiable financial instrument issued by a domestic depository in India against the shares of a foreign company held by an overseas custodian. Each IDR represents a specific number of underlying shares of the issuing foreign company.

• The foreign company deposits its shares with a custodian bank located in its home country.
• The domestic depository (an Indian financial institution) issues the corresponding IDRs to Indian investors.
• These IDRs are then listed and traded on Indian stock exchanges such as the BSE and NSE.

Thus, an IDR functions similarly to American Depository Receipts (ADRs) or Global Depository Receipts (GDRs), which enable international investment in domestic shares.

Structure of an IDR Issuance

1. Issuing Company (Foreign Entity): The company incorporated outside India that seeks to raise capital from Indian investors.
2. Overseas Custodian Bank: Holds the underlying equity shares of the foreign company in trust.
3. Domestic Depository (in India): Issues the Indian Depository Receipts to investors based on the shares held by the overseas custodian.
4. Indian Investors: Buy and trade IDRs through Indian stock exchanges in Indian Rupees.
5. Stock Exchanges: The IDRs are listed on recognised Indian exchanges (BSE/NSE) for trading and liquidity.

Process of Issuing Indian Depository Receipts

1. Filing Application: The foreign company files a draft prospectus with the Securities and Exchange Board of India (SEBI) for approval.
2. Appointment of Intermediaries: The company appoints a domestic depository, an overseas custodian bank, and a merchant banker for managing the issue.
3. Deposit of Shares: The foreign company deposits its shares with the overseas custodian bank.
4. Issuance of IDRs: The domestic depository issues the IDRs in India, representing ownership of those shares.
5. Listing and Trading: The IDRs are listed on Indian exchanges and traded like other equity instruments.
6. Conversion and Redemption: Subject to regulations, IDRs can be converted into the underlying shares of the foreign company or redeemed after a lock-in period.

Regulatory Framework in India

The issue and trading of IDRs are governed by multiple regulations:

• Companies Act, 2013 (formerly Companies Act, 1956) – Sections 390 to 394.
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
• Reserve Bank of India (RBI) guidelines under the Foreign Exchange Management Act (FEMA), 1999.

Eligibility Criteria for Issuing Company:

• The issuing company must be listed in its home country.
• It should have a track record of profitability for at least three years.
• The issue size must be a minimum of ₹50 crore.
• Compliance with SEBI’s disclosure and corporate governance standards is mandatory.

Features of Indian Depository Receipts

Advantages of Indian Depository Receipts

For Foreign Companies:

1. Access to Indian Capital Markets: Enables global companies to raise funds from India’s growing investor base.
2. Increased Visibility: Expands brand recognition and market presence in India.
3. Diversified Investor Base: Attracts institutional and retail investors from a new geography.
4. Enhanced Liquidity: IDRs create an additional market for the company’s shares.

For Indian Investors:

1. Global Investment Opportunity: Allows domestic investors to invest in reputed foreign companies without currency or regulatory complications.
2. Diversification of Portfolio: Offers international diversification within the Indian market.
3. Trading Convenience: IDRs are traded in Indian Rupees on local exchanges, simplifying transactions.
4. Dividend Benefits: Investors receive dividend payments in Indian Rupees.

Disadvantages and Challenges of IDRs

1. Limited Liquidity: IDRs have low trading volumes in India due to limited awareness and market participation.
2. Complex Regulations: Multi-layered regulatory requirements and tax complexities deter frequent issuance.
3. Currency and Conversion Restrictions: Conversion of IDRs into underlying foreign shares is subject to RBI and SEBI restrictions.
4. Lack of Market Interest: Despite the benefits, few foreign companies have used this route to raise capital in India.
5. Dividend and Tax Complications: Differences in taxation laws between countries can lead to double taxation or delayed payments.

Example: Standard Chartered Bank IDR (2010)

• Issuer: Standard Chartered PLC (UK-based banking group).
• Issue Year: 2010.
• Issue Size: Approximately ₹2,500 crore.
• Listing: National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
• Issue Price: ₹104 per IDR.
• Conversion Ratio: 10 IDRs = 1 underlying share.

This was the first and only major IDR issuance in India. While it initially attracted investor attention, trading volumes declined over time due to limited liquidity and complex conversion procedures.

Comparison: IDR vs ADR vs GDR

Taxation of IDRs in India

• Dividend Income: Taxable in the hands of investors under the Income Tax Act, 1961.
• Capital Gains: Profits from selling IDRs are treated as capital gains.
  • Short-term capital gains (if held < 12 months): Taxed at 15%.
  • Long-term capital gains (if held > 12 months): Taxed at 10% (without indexation).
• Double Taxation Avoidance: May apply depending on the tax treaty between India and the issuer’s home country.

Future Prospects of Indian Depository Receipts

• With India’s capital markets becoming increasingly sophisticated, the IDR mechanism could gain traction as more global companies seek exposure to Indian investors.
• Regulatory simplification, tax incentives, and greater investor education could make IDRs a more attractive option.
• Integration with International Financial Services Centres (IFSCs) like GIFT City may also provide a conducive environment for IDR listings and trading.