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Indian Depository Receipt (IDR)

What is a Depository Receipt ? A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries.

How Does the DR Work? The DR is created when a foreign company wishes to list its already publicly traded shares or debt securities on a foreign stock exchange. Before it can be listed to a particular stock exchange, the company in question will first have to meet certain requirements put forth by the exchange. Initial public offerings, however, can also issue a DR. DRs can be traded publicly or over-the-counter.

INDIAN DEPOSITORY RECEIPTS (IDR): SEBI has issued guidelines for foreign companies who wish to raise capital in India by issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed on Indian stock exchanges in the form of depository receipts. Such IDRs will be created by a Domestic Depositories in India against the underlying equity shares of the issuing company which is incorporated outside India. IDRs will be freely priced yet in the prospectus the issue price has to be justified. Each IDR will represent a certain number of shares of the foreign company.The shares will not be listed in India, but have to be listed in the home country. The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companies and that too without the risk of investing directly which may not be too friendly. Thus, now Indian investors will have easy access to international capital market. Normally, the DR are allowed to 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.

Eligibility for Investors (Qualifiers): SEBI has issued guidelines for issuance of IDRs in April, 2006; some of the major norms for issuance of IDRs are as follows:

1. SEBI has set Rs 50 crore as the lower limit for the IDRs to be issued by the Indian companies. Moreover, the minimum investment required in the IDR issue by the investors has been fixed at Rs Two lakh. 2. Non-Resident Indians and Foreign Institutional Investors (FIIs) have not been allowed to purchase or possess IDRs without special permission from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good track record with respect to securities market regulations and companies not meeting the criteria will not be allowed to raise funds from the domestic market. 3. If the IDR issuer fails to receive minimum 90 per cent subscription on the date of closure of the issue, or the subscription level later falls below 90 per cent due to cheques not being honoured or withdrawal of applications, the company has to refund the entire subscription amount received. 4. In case of delay beyond eight days after the company becomes liable to pay the amount, the company shall pay interest at the rate of 15 per cent per annum for the period of delay.

Objective: To gain knowledge on DRs and to know the advantages and eligibility criteria for IDR.

Conclusion:

DR is a means to increase global trade, which in turn helps increase not only volumes on local and foreign markets but also the exchange of information, technology, regulatory procedures as well as market transparency.

Bibliography:

1. International Finance Govind Sowani 2. http://en.wikipedia.org/wiki/Indian_Depository_Receipt 3. 19014696-ADR-and-GDR.pdf