The Securities and Exchange Board of India (Sebi), has introduced guidelines for foreign companies to raise

capital here by issuing Indian depository receipts (IDRs). The Indian capital market regulator has laid down
detailed norms for foreign companies to tap the Indian market and list on domestic bourses. It has set a
minimum size of the IDR float at Rs 50 crore and the minimum investment limit at Rs 2 lakh per investor.
What is an IDR, how different is it from a GDR/ADR, and how will it work in the Indian context.

fe takes a Closer Look at all these issues:

What are Depository Receipts (DRs)?

A DR is a type of negotiable (transferable) financial security traded on a local stock exchange but represents a
security, usually in the form of equity, 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 depository 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 depository receipts (GDRs). The
other most common type of DRs are European DRs and International DRs. ADRs are typically traded on a US
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 US dollars, but can also be denominated in Euros.

What are Indian Depository Receipts (IDRs)?

IDRs are transferable securities to be listed on Indian stock exchanges in the form of depository receipts
created by a Domestic Depository in India against the underlying equity shares of the issuing company which
is incorporated outside India.

How are IDRs different from GDRs and ADRs?

GDRs and ADRs are amongst the most common DRs. When the depository bank creating the depository
receipt is in the US, the instruments are known as ADRs. Similarly, other depository receipts, based on the
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location of the depository bank creating them, have come into existence, such as the GDR, the European
Depository Receipts, International Depository Receipts, etc. ADRs are traded on stock exchanges in the US,
such as Nasdaq and NYSE, while GDRs are traded on the European exchanges, such as the London Stock
Exchange

How do DRs work?

DRs are created when a foreign company wishes to list its securities on another country’s stock exchange. For
this, the issuing company has to fulfil the listing criteria for DRs in the other country. Before creating DRs, the
shares of the foreign company, which the DRs represent, are delivered and deposited with the custodian bank
of the depository creating the DR. Once the custodial bank receives the delivery of shares, the depository
creates and issues the DR to investors in the country where the DRs are listed. These DRs are then listed and
traded in the local stock exchanges of the other country.

How will the IDRs be priced, and will cross-border trading be allowed?

IDRs will be freely priced. However, in the IDR prospectus, the issue price will have to be justified as is done
in the case of domestic equity issues. Each IDR will represent a certain number of shares of the foreign
company. The shares will be listed in the home country. Normally, the DR can be exchanged for the
underlying shares held by the custodian and sold in the home country and vice-versa. However, in the case of
IDRs, automatic fungibility is not permitted.

What are the benefits of issuing IDRs to companies?

They lead to increased access to capital, are a means of increasing global visibility and trade, allow increased
liquidity and global benchmark valuation and an international shareholder base

And what about investors?

They allow global investing opportunities without the risk of investing in unfamiliar markets, ensure more
information and transparency and improve the breadth and depth of the market.

Why will foreign companies issue IDRs?

Any foreign company listed in its home country and satisfying the eligibility criteria can issue IDRs. Typically,
companies with signifi-cant business in India, or an India focus, may find the IDR route advantageous.
Similarly, the foreign entities of Indian companies may find it easier to raise money through IDRs for their
business requirements abroad..

Global Depositary Receipts

Chris Prior-Willeard, Bank of New York

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Global Depository Receipts (GDRs) have come into prominence recently as being the favoured instrument by
which companies from emerging markets such as Russia, India and China raise capital on western stock
exchanges. Yet GDRs are rarely fully understood by the people that use them, either because they appear
‘complicated’ (they are not) or because they are thought to be something to do with the ‘back office’ (this is
only true of the settlement of GDRs). This article is intended to explain more about these instruments and to
provide some commentary about their role in the wider marketplace.

Until now, the restricted circulation of knowledge about GSRs has not been a significant problem for the small
number of banks with the ability to issue GDRs, since the traders in emerging markets were happy to quote
 prices for GDRs as much as they would for ordinary shares and in fact pretty much anything else. However,
there are now some awesomely large Russian companies which are actively traded outside Russia in GDR
form, and a growing host of other companies from emerging markets around the globe. These are attracting the
attention of regulators, portfolio strategists, derivative traders and others, and the demand for knowledge about
GDRs is therefore increasing.

The objective of a GDR is to enable investors in developed markets, who would not necessarily feel happy
buying emerging market securities directly in the securities’ home market, to gain economic exposure to the
intended company and, indeed, the overall emerging economy using the procedures with which they are
familiar.

Depository Receipts (DRs) have a long and respectable history. These instruments have served for decades to
reduce obstacles to investment between one market jurisdiction and another. Putting it more simply they
convert, say, a UK share into a US share. And although the same share is governed by two very different
regulatory regimes, it trades happily in both regimes without needing any surgery (structuring) whatsoever.

Importantly, the prices of that same share trading in the US and the UK, albeit in different currencies, remain
linked.

The history of the GDR began in the late 1920s when Selfridges, the London department store, decided to
expand its investor population in the US. The rules in the UK governing the transfer of shares were strict: all
transfers were required to pass through the list of registered holders held by the share registrar, who was
invariably located in England. In those days it was not felt necessary to specify the geographic scope applying
to this rule. Therefore if a US investor in Selfridges wished to sell his shares to another investor via the New
York Stock Exchange, the transfer was not considered legal until a two-legged communication had been
successfully completed with the UK share registrar.

With the Cunard liners of the day taking four days to cross the Atlantic carrying the mail, the whole process of
trading a UK share in New York could take weeks before final settlement was complete.

A US bank, Guaranty Trust, solved the problem by holding the Selfridges shares in London in its own name,
which was recorded on the UK register, and then issuing promissory notes representing those shares in New
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York. Being both denominated in US dollars and issued against a US legal contract with investors, the
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promissory notes traded as US securities in New York and worked in exactly the same manner as other US
securities. Ownership of the promissory notes was recorded in a US-held register.

These promissory notes became known as American Depositary Receipts.

Since then a surprisingly large number of markets have used the DR format to overcome the difficulties of
investing across national and economic borders. These include to mention a few:

 Austrian
 Australian
 Belgian
 Brazilian
 Canadian
 Dutch
 German
 Indian
 Japanese
 Korean
 Russian
 South African
 Swedish
 Swiss
 Taiwanese

However, all these DRs share one important characteristic: they can be exchanged for the shares they represent
in their home market. In other words, the DRs can be cancelled by the holder surrendering them to the issuing
or depository bank, whereupon the shares they represent will be released to the investor in the home market.

This ‘exchange’ facility is important as it ensures a price linkage between the two markets. Clearly, if the price
of the DRs began to deviate upwards from a practical price of the home share, there would be economic benefit
to DR holders in cancelling DRs and selling underlying shares in the home market.

 American depositary receipts, or ADRs, are a bit of financial magic that deliver the world to the doors of US
investors.

First introduced by the investment house of JP Morgan in 1927, ADRs are simple in concept. In the most basic
terms, A United States bank or investment institution places a certain amount of stock of a foreign company
into its vaults - the "depositary" part of the name - then allows investors to buy shares in that collection of
stocks, priced in US dollars.
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Those shares, or receipts, can then be traded on regular stock markets almost as though they were shares held
directly in the foreign company itself, only the arrangement is better for US investors. Since ADRs are traded
in US dollars and are securities that originate within the United States, they carry none of the cross-border fees
or other hassles that might ensue if an investor from Peoria were to try to buy stock directly in a South Korean
steel mill. The worst most investors have to worry about are small fees, often a few pennies per ADR per year,
charged by the depository institution to cover their costs of offering the service.
Thus, in a sense, US investors gain access to the world through ADRs without having to leave the comfort of
their own living rooms.

ADRs vs. Stocks

Like normal stocks, ADRs tend to trade at levels that track the financial health of their underlying companies.
Still, there are important differences between an ADR and a directly held stock.

For example, there are different flavors of ADRs, each of which carries a different level of reporting
responsibility - in other words transparency in reporting their financial health - to US regulators and investors.

Unsponsored shares: These offer the lowest level of entry into the American market. Unsponsored shares trade
only on over-the-counter markets - not on the major US stock exchanges - and bear no responsibility to report
to US regulatory agencies. They are rarely issued today.
Level I: These shares can also only be traded on over-the-counter markets, but they are generally issued
through only one US agent - their depositary "sponsor." Regulatory reporting requirements are still minimal.
Quarterly or annual reports are not required. Even if such reports are issued, they are not required to adhere to
US standards of generally accepted accounting principles, or GAAP, and the companies can post their results
in a foreign currency.
Level II: Companies that want to sell ADRs to US investors at this level have to register with the Securities
and Exchange Commission and file an annual report that complies with GAAP standards. This is the lowest
level of shares that can be listed on a US stock exchange.
Level III: This is the gold standard of ADR ratings. It allows foreign companies to issue shares directly into the
US, rather than simply allowing the indirect purchase of already created shares. In exchange, the company is
required to file annual reports that comply with GAAP standards, typically something known as a form 20-F
(compared to the regular 10-K filing by companies in the United States). And it is required to share any news
that it distributes within its home country to US investors as well.
ADRs' Special Risks

Of course, even though they trade in US dollars and can, at least on the surface, closely mimic the look and
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feel of American stocks, ADRs come with their own set of special considerations to keep in mind.
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Currency risk: If the value of the US dollar rises against the value of the company's home currency, a good
deal of the company's intrinsic profits might be wiped out in translation. Conversely, if the US dollar weakens
against the company's home currency, any profits it makes will be enhanced for a US owner. For more
information on how this could damage or inflate your results, read The Danger of Investing in International
Bonds.
Political risk: ADR status does not insulate a company's stock from the inherent risk of its home country's
political stability. Revolution, nationalization, currency collapse or other potential disasters may be greater risk
factors in other parts of the world than in the US, and those risks will be clearly translated through any ADR
that originates in an affected nation.
Inflation risk: Countries around the globe may be more, or less, prone to inflation than the US economy is at
any given time. Those with higher inflation rates may find it more difficult to post profits to an US owner,
regardless of the company's underlying health.

In other words, ADRs are just what they seem: a representation of a foreign stock, rather than an actual holding
in the company. Because of all of the considerations listed above, an ADR of a foreign company in the US.
may trade a little ahead or a little behind the price the company commands in its own currency in its own home
base. But it's safe to say that buying an ADR is the closest an American investor can come to participating
directly in the rest of the world's economy.

Global banking giant Standard Chartered PLC is likely to raise up to $1 billion through Indian Depository
Receipts.
In recent years, the securities markets have become increasingly international and it has become easier to trade
internationally around the world. A growing number of countries have opened their stock markets to foreign
investors and abolished laws restricting their citizens from investing abroad. Companies that previously had to
raise capital in the domestic market can now tap foreign sources of capital.
Indian companies such as VSNL, MTNL, BPL, etc. have since the mid-90s listed American Depository
Receipts (ADRs) and Global Depository Receipts (GDRs) in London, Luxembourg and New York to raise
funds from international sources. The trend now is moving the other way. 
As the Indian stock markets have become deeper and with the BSE Sensex now above 17,000, global
companies have become interested in tapping the Indian markets for funds.
A recent example is that of the global banking giant Standard Chartered PLC (SCP) which is likely to raise up
to $1 billion (over Rs 4,500 crore) through Indian Depository Receipts (IDRs).  
SCP is currently in discussions with anchor investors for its IDR issue. The issue is likely to come out in June.
The bank had filed a draft red herring prospectus (DRHP) for its IDR with capital market regulator Securities
and Exchange Board of India (SEBI) in March 2010.
Indian Depository Receipt (IDR): A Background
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An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a
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‘Domestic Depository’ (custodian of securities registered with SEBI) against the underlying equity of the
issuing company in order to enable foreign companies to raise funds from the Indian securities markets. The
receipts are based on a ratio of shares equivalent to depository receipts.
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. 
In addition, the regulations state that in the case of raising of funds through the issuance of IDRs by
financial/banking companies having a presence in India, either through a branch or subsidiary, the approval of
the sectoral regulator(s) should be obtained before the issuance of IDRs.  Therefore, the approval of the
Reserve Bank of India (RBI) will need to be obtained for the Standard Chartered IDR.
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 would be the first IDR ever undertaken, there will be 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.
Benefits of IDRs for Indian Investors and Rights
--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.
--Additional key requisites for investing in foreign securities such as a securities trading account outside India
to hold foreign securities, know your customer norms (KYC) with foreign broker and foreign bank account to
hold funds are generally too cumbersome for most Indian investors. Such requirements are avoided in holding
IDRs.
--Whatever benefits accrue to the shares, by way of dividend, rights, splits or bonuses would be passed on to
IDR holders also, to the extent permissible under Indian law. 
Benefits for International Issuers
The main benefit would be in terms of branding, besides allowing foreign companies to access Indian capital.
IDRs also allow the creation of acquisition currency and a management incentive tool. Issuers have the option
to reserve a proportion of the issue for their employees. 
Challenges for IDRs
There is the possibility of IDR issues being undersubscribed if they are not well marketed or fail to catch the
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imagination of investors.  In addition, the challenges mentioned below are certain challenges with respect to
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the issuance of IDRs.

--Stringent eligibility norms: The stringent eligibility criteria, disclosure and corporate governance norms
(Although in the investor’s interests, they compare unfavourably with listing norms on other tier II global
exchanges such as Luxembourg, London’s Alternate Investment Market (AIM) and Dubai. This could result in
higher compliance costs for companies seeking to tap the Indian capital markets).
--Fungibility: Current regulations do not provide for the exchange of equity shares into IDRs after the initial
issuance i.e. reverse fungibility is not allowed.
--Tradability of IDRs:  How one trades in the instrument/how the instruments are traded.
--Returns on IDRs: What kind of returns would be made on the instrument.
--Risks: What risks are involved given that the same shares would be simultaneously trading in London and
Hong Kong.
--Taxation:  Lack of clarity on taxation.  It is not clear whether IDRs are exempt from capital gains tax.
--Voting Rights:  It is not entirely clear whether IDR holders will have voting rights or not – the SEBI
guidelines do not specifically mention voting rights, it leaves that to the discretion of the issuer.
--Market:  Indian financial markets are still considered volatile and contain emerging market risk.
Tax issues: Related to IDRs
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 (ie. 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.
Conclusion
IDRs are a significant step towards the internationalization of the Indian security markets which would also be
a potential benefit for the domestic investors in India. There remain a number of challenges as detailed above. 
However, if the Standard Chartered IDR is successful, it may herald a new trend of international companies
listing IDRs in India.  In the future, India may become a source for capital for international issuers.
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