In a move to help in attracting foreign entities to list their Indian Depository Receipts (IDRs) on domestic bourse, financial regulators — Reserve Bank of India (RBI) and Securities & Exchange Board of India (Sebi), have now allowed partial flexibility in conversion of IDRs into equity shares by investors, while capping the funds to be raised through such instruments at $5 billion.
In a circular issued last evening, Sebi said: 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."
The government in fiscal 2013 Budget had proposed to allow two-way fungibility of IDRs to encourage greater foreign participation in the Indian capital market. Simultaneously, RBI in a separate circular also said there would be an overall cap of USD 5 billion for raising of capital through IDRs by foreign companies in Indian markets.
"This cap would be akin to caps imposed for FII investment in debt securities and would be monitored by Sebi," it said.
Further, RBI stated that the two-way fungibility allowed for IDRs are similar to the limited two-way flexibility allowed for ADRs and GDRS issued by domestic companies in foreign markets. Simply put, the 2-way fungibility allows Indian shareholders to convert their depository receipts into equity shares of the issuer company and vice versa.
The fungibility issue is viewed as one of the major factors restraining foreign entities from listing their IDRs. So far, only UK banking major Standard Chartered in 2010 has come out with their IDRs.
"Suitable instructions for modifying the existing legal framework governing IDRs, in order to implement the decision to allow redemption of IDRs into underlying equity shares and re-conversion of equity shares of a foreign issuer (which has already listed their IDRs) into IDRs, will be issued separately," the circular said.