IDR, a new era for investor

New option: This tool to let Indians participate in global growth

IDR, a new era for investor

 Till recently, it would have been impossible to do so. But not any more. Just like Indian companies such as Infosys, Wipro or Ranbaxy are listing their shares in the foreign stock exchanges like London and New York by issuing American Depository Receipts (ADR) or Global Depository Receipts (GDR), foreign companies can now issue Indian Depository Receipts or IDR to list their shares in the Indian stock markets. The first such IDR, planned by the global bank major Standard Chartared (Stanchart) is slated to hit the Indian market in a month for which the process is on.

To start with, IDR is a security that was proposed at least eight years back, while the Ministry of Corporate Affairs notified the rule in 2004 and market regulator Sebi, since then issued various amendments and operational guidelines for issue of IDR by foreign companies. But It was only towards the last quarter of 2009 that Stanchart plc, a British company listed on the London and Hong Kong bourses, decided to issue the first IDRs in the country. Accordingly, Stanchart IDR is now set to open by May-end and its listing would take place in June, said one of the merchant bankers associated with the issue.

Stanchart plans to raise up to Rs 3,000 crore through sale of IDRs and it may dilute about 1.3 per cent of its capital to build its brand in a country that provides a fifth of its total profits. Stanchart CEO for India & South Asia region Neeraj Swaroop said: “the IDR issue is not just raising capital but about building up our brand and presence in the country.”

Stanchart is likely to sell 22 crore IDRs but has not indicated as yet how many receipts will represent one share. One estimate in the banking circles is that about 8-11 receipts may represent one London-listed share and these receipts are securities that would be traded on BSE & NSE.  Local prices of IDR will closely follow the overseas share price.

The singnificance of the Stanchart issue, market analysts believe, will open the gate for other IDRs from many MNCs creating a new era for the Indian capital market. “This (IDR by Stanchart) will be a landmark event for the Indian capital markets and will open the gates for other global companies to raise money from the country,” says HDFC Bank Head of Investment Banking N S Kishore Kumar.

What IDR means to investors  
IDRs, first and foremost,  provide an opportunity to diversify an investor’s portfolio allowing him to participate in the fortunes of overseas companies using the existing demat account and bank account used to buy/ hold shares of local companies.
However, unlike normal share issuances, investors in these receipts will have to pay a small fee for any share action like dividend payments, share sale or purchase, since a custodian will be holding shares on behalf of the investors and serve them. IDR holders will be charged a fee of $0.016 or less per share and that amount will be deducted by the depository from each cash dividend, or other cash distribution, said Stanchart’s offer document.

During rights issue, any free distribution of shares or stock dividend, receipts holders will have to pay a fee determined by the depository to reflect costs and expenses.  Not all Indian investors are keen to take the trouble of acquiring foreign currency and buying shares abroad, and then go about managing the accounts abroad –– with a demat account outside India to hold foreign securities –– which calls for KYC compliances with foreign broker and maintain foreign bank account to hold funds which are too bothersome for most investors.  As against those hassles, IDR is an easy way out to own foreign shares, sitting in India. 

Above all, the RBI rule stipulate that no resident individual can hold more than $200,000 worth of foreign securities including shares per foreign exchange regulations. However, this will not be applicable for IDR category where investors pay in rupees, out of their bank accounts, and get equivalent rights of the underlying shares.

Voting rights
Though Indian investors holding IDRs cannot attend AGMs (Annual General Meeting) of companies, they do have equivalent rights as shareholders and can vote on EGM (Extra-ordinary General Meeting) resolutions through the overseas custodian. Whatever benefits accrue to the shares, by way of dividend, rights, splits or bonuses will be passed on to the IDR holders also, to the extent permissible under Indian law.  Essentially, Indian investors in IDRs are actually holders of the proportional number of shares, so all benefits are rightfully theirs including voting on AGM resolutions through the overseas custodian. And for all corporation actions too, IDR holders would be treated on an equitable basis vis-a-vis other shareholders.  In short, the Indian investors would also have Rights of legal recourse against the Issuer Company or the Domestic Depository as specified in the deposit agreement.
Even as IDRs will be issued in demat form, subsequently they may be held in physical form at the option of the IDR holder after payment of certain fee. IDRs will be listed on the NSE and the BSE, where trading will be done in demat form. Also trading and settlement will be similar to ordinary shares listed on NSE and BSE except for terms relating to Securities Transactions Tax.  As Sebi regulations envisage that a company issuing IDRs has to be necessarily listed abroad, investors can always track the price of the underlying shares in the foreign exchange.

Attraction for issuers
Needless to say that IDR is an attractive option for foreign companies as it provides enhanced local branding and gives access to the capital pool within the country and creates opportunities for future fund raising. Further, IDRs can be used as acquisition currency to acquire Indian companies in exchange of IDRs. They can be used as talent retention tool as foreign company can issue ESOP plans based on IDRs. “We believe that listing in India will go a long way towards increasing our visibility and profile in the market,” Stanchart Executive Board Member Jaspal Singh Bindra said, while pointing out that the object of the (IDR) issue was not just to raise money.

In this context, Vantage Institute of Financial Markets Director Rajesh Dedhia avers: “Once the first issue of IDRs by Stanchar goes through, the regulatory die will be cast and others will come forward.” According to him, foreign companies eyeing double digit growth in areas like consumer durables, mobile handsets, hotels and cars will be the ones who will form or join the queues for issuing IDRs in India.
Sebi’s IDR guidelines detail the kind of companies that can list their depository receipts. Kumar of HDFC Bank expects that only companies in sectors that expect to grow at multiples of India’s economic growth will issue IDRs.
Banking and insurance sectors, according to him, are expected to grow two-three times the economic growth and will constantly need capital. Currently, Indian markets offer a better earnings multiple and local capital also does away with currency risks, experts are of the view that issuing IDRs is apt for banks and insurance firms. “IDRs will be a significant way to raise capital in the next five to 10 years,” Kumar said.
DH News Service

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