RBI clears proposal for IDR issues

New guideline

Simply put, IDR is an equivalent of Global Depository Receipts (GDRs) or American Depository Receipts (ADRs), issued by a foreign firm to raise funds from the Indian capital market.  Issuing the new guidelines last evening, RBI said this would allow companies outside India and foreign financial or banking companies with presence in India, either through a branch or subsidiary, to raise funds through IDRs.  They would require the approval of regulators concerned — like RBI, Sebi and IRDA — before issuing IDRs.
The guidelines could prompt several foreign companies including foreign banks to raise money through IDR route.  Also, IDRs to be denominated in Indian currency will not be redeemable into underlying equity shares before one year from the date of issue. At the same time, IDR rules out automatic fungibility — in the sense these companies (IDR issuers) will not be allowed to purchase any property or assets in India using these resources.

Annoyance voiced

In this context, a section of the investment community is annoyed over the rationale of not allowing fungibility saying, “When Indian companies go for ADR or GDR issues there is no restriction in investing that money.  By the same logic IDR money should be allowed to to invest in India.”

However, mutual funds investing in IDRs may either sell or continue to hold the underlying shares as per Foreign Exchange Management Act (Fema) guidelines. Individual investors can only hold the shares for the purpose of sale within 30 days from the date of conversion. Investment analysts point out that IDR comes in handy for smaller international companies who were finding difficulty in raising funds from the US and European markets due to risk aversion in the wake of the dollar crunch and the global economic slowdown.

 Perhaps, the first foreign entity to come out with an IDR issue will be Standard Chartered Bank which is awaiting approval from the RBI for the same. Even though the government had announced the introduction of IDRs, denominated in India rupees, in 2004, it will be operational now onwards as the new RBI guidelines will make necessary changes in FEMA.  NRIs will also be allowed to invest in IDRs out of funds held in their NRE/FCNR(B) accounts, maintained with authorised dealers/banks. NRE or FCNR (B) accounts are Indian rupee and foreign currency denominated deposit accounts, respectively.

DH News Service