In this article, Parth Sarthy Kaushik discusses how can a foreign company access Indian securities market to raise funds.

A foreign company desirous of accessing Indian securities market for the purpose of raising funds is not permitted to directly list its equity shares on an Indian stock exchange and can only issue Indian Depository Receipts (IDRs). IDR is a rupee denominated negotiable financial instrument which can be listed and publicly traded on an Indian stock exchange. It represents the underlying equity shares of a foreign listed company. Thus, IDRs allow Indian investors to diversify their investments by providing access to the shares of foreign companies at a lower cost and better terms. Further, it provides foreign companies with brand recognition in the Indian market and opportunity to expand their investor base.

Eligibility to Issue IDRs

A company shall, in addition to the directions issued by SEBI and RBI from time to time, meet the following criteria to be eligible to make an issue of IDRs:-

As per Rule 13 (2) of the Companies (Registration of Foreign Company) Rules, 2014

• Its pre-issue paid-up capital and free reserves are at least USD 50 million and it has a minimum average market capitalization (during the last three years) in its parent country of at least USD 100 million.
• It has been continuously trading on a stock exchange in its parent or home country (the country of incorporation of such company) for at least three immediately preceding years.
• It has a track record of distributable profits in terms of section 123 of the Companies Act, 2013 for at least three out of immediately preceding five years.
• It fulfils such other eligibility criteria as may be laid down by the Securities and Exchange Board of India from time to time in this behalf.

As per Regulation 97 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR)

• The issuing company is listed in its home country.
• The issuing company is not prohibited to issue securities by any regulatory body.
• The issuing company has track record of compliance with securities market regulations in its home country.

As per Rule 4 of the Companies (Issue Of Indian Depository Receipts) Rules, 2004 (IDR)

• Its pre-issue paid-up capital and free reserves are at least USD 100 million and it has had an average turnover of USD 500 million during the 3 financial years preceding the issue.
• It has been making profits for at least five years preceding the issue and has been declaring dividend of not less than 10% each year for the said period.
• Its pre-issue debt equity ratio is not more than 2:1.

Process of Issuance of IDRs

As per Rule 13 (3) of the Companies (Registration of Foreign Companies) Rules, 2014 the process for the issuance of IDRs is very similar to an initial public offering (IPO) by a domestic company and broadly involves the following procedure:

1. Preparation of draft prospectus which is to be filed (along with a due diligence report) with the Securities and Exchange Board of India (SEBI) at least ninety days prior to the opening date of the IDR issue.
2. Once SEBI grants principal approval to the issue, a prospectus, which shall incorporate all the changes and suggestions made by SEBI, is required to be filed with both SEBI and the Registrar of Companies (RoC).
3. Appointment of an overseas custodian bank and a Domestic Depository for the purpose of issue of IDRs.
4. Deliver the underlying equity shares to the Overseas Custodian Bank which in turn shall authorize the domestic depository to issue IDRs to the investors through a public offer.
5. Obtain listing permission from one or more stock exchanges having nationwide trading terminals.

It is to be noted that the Trading and settlement procedure for IDRs is similar to the one prescribed for Indian shares.

Who can Invest in IDRs?

Any person who is a resident of India as defined in Section 2 (v) of the Foreign Exchange Management Act, 1999 can invest in IDRs. As per Regulation 98 of ICDR Regulations, 2009 the minimum application amount in an IDR issue shall be Rs. 20,000 and at least 50 % of the IDRs issued shall be subscribed by Qualified Institutional Buyers (QIBs). Further, a minimum of 30% of IDRs being offered in the public issue are required to be allocated to retail individual investors (However, exemption can be given in the case of under subscription in retail individual investor category).

Rights of IDR Holders

IDRs are similar to equity shares and IDR holders are entitled to same rights (such as entitlement to bonus issues, dividends and rights issues etc.), except attending Annual General Meeting and voting on special resolutions, as are enjoyed by the shareholders of the issuer company in its parent country.

The rights available to an IDR holder are exercised in accordance with the depository agreement (which is also summarised in the draft prospectus) through the domestic depository and overseas custodian bank.

Distribution of Benefits

The process is similar to distribution or corporate action by any domestic Indian company. On the receipt of dividend or other corporate action on the IDRs, the Domestic Depository notifies IDR holders of such distributions and follows the following process:

1. Bonus Issue – The proportionate IDRs are credited into the dematerialised account of the IDR holders.
2. Rights Issue – The Domestic Depository makes application forms available to the IDR holders and IDR holders are required to apply for their proportionate rights. Thereafter, the Domestic Depository credits the IDRs to the dematerialised account of the relevant IDR holders.
3. Dividend – The cash dividend is either credited to a bank account or warrants are dispatched to IDR holders.

It is to be noted that if, for any reason, it is not possible to distribute underlying equity shares then such underlying equity shares or interest in such underlying equity shares is generally sold by the Domestic Depository and the resulting cash (excluding certain fees and expenses) is paid to the IDR holders.

Conversion of IDRs into Equity

IDR holders can convert/redeem IDRs into the underlying equity shares after one year from the date of issuance, subject to the compliance of the Foreign Exchange Management Act, 1999 and regulations issued by SEBI and the Reserve Bank of India (RBI).

However, IDR holders are permitted to convert only up to 25% of their originally issued IDRs into underlying shares in a financial year (See, SEBI Circular dated August 28, 2012) and this option can be exercised during the Fungibility Window i.e. the time period specified by the issuer company during which IDR holders can apply for conversion/redemption of IDRs.

Further, SEBI requires the issuer company to fix and declare the total number of IDRs available for conversion/redemption before the opening of the fungibility window and 20 % such IDRs are required to be reserved for retail investors.

It is pertinent to note that the SEBI norms on Redemption of Indian Depository Receipts (IDRs) into Underlying Equity Shares provides for two-way fungibility i.e. fungibility is not restricted to just conversion of depository receipts into equity shares but also provides for underlying shares to be converted into IDRs.

Conclusion

Indian Depository Receipts allows foreign companies to access Indian capital and provide tremendous opportunities in terms of branding by becoming part of the Indian growth story. Further, foreign companies looking to expand their business operations in India can use IDRs as a tool to raise acquisition currency (i.e. the money raised through IDRs can be used to structure various investments and acquisition transactions in India). Therefore, it is expected that a surge in the popularity of IDRs is inevitable as Indian economy keeps on improving and creating a tremendous interest among foreign companies to step up their business operations in India.