JOIN USSebi issues norms on two-way fungibility of IDRs
The Securities and Exchange Board of India (Sebi) has issued guidelines for the partial fungibility of Indian depository receipts (IDRs) into underlying equity shares up to 25 per cent of the IDRs originally issued on domestic bourses, which comes into force with immediate effect.
Fungibility is all about redemption or conversion of IDRs in underlying equity shares of a listed company.
In a notification issued, Sebi said: “The IDRs shall be fungible into underlying equity shares of the issuing company in the manner specified by the Board and Reserve Bank of India, from time to time." With this move, the government seeks to attract a large number of foreign companies to get listed in Indian stock market.
The Sebi notification also stated that 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.
Last August, Sebi had said that investors would have partial flexibility in dealing with IDRs and can convert up to 25 per cent of their IDRs into underlying shares in a financial year.
It also stated that the two-way fungibility would enable Indian shareholders to convert their depository receipts into equity shares of the issuer company and vice-versa, which in this case should be the number of IDRs originally issued less the number of IDRs outstanding and adjusted for IDRs redeemed into underlying equity shares.
In case of option of converting the IDRs into underlying equity shares and providing the sale proceeds to the IDR holders is exercised, the issuer should disclose the range of fixed/variable costs in percentage terms upfront and ensure that all costs together shall not exceed 5 per cent of sale proceeds.
Fungibility issue is seen as one of the major factors restraining foreign entities from listing their IDRs. So far, only Standard Chartered in 2010 has come out with its IDRs.