The Hindu Business Line : Idiosyncrasies in IDR

WITH the notification of "The Companies (Issue of Indian Depository Receipts) Rules, 2004" (the IDR rules) on February 23, 2004, enabling environment has been created and decks cleared for foreign companies to tap the Indian capital market.

IDRs are to Indian investors in foreign companies what GDRs and ADRs are for foreign investors in Indian companies. IDRs have trailed GDRs/ADRs by more than a decade.

The Government evidently sequenced it that way because the first priority was to augment foreign exchange reserves. The moot question, however, is whether foreign companies would evince the same kind of interest in the Indian capital market as Indian companies have been evincing in the European and American markets.

Indian companies have lapped up the GDR/ADR regime to mobilise capital in precious foreign exchange. The same enthusiasm may not be forthcoming from foreign companies given the fact that the Indian rupee is not in the same league as the American dollar. But then it would be wrong to write a premature obituary for IDRs on this ground because there could be other reasons for foreign companies to seek out Indian investors — lack of appetite for their shares in their own countries could be one such.

It is here that the IDR rules have gone wrong. By prescribing a minimum net worth of $100 million and a minimum average turnover during the three financial years preceding the issue of $500 million, the IDR rules have shut the doors on the face of well-managed medium-sized companies that may be wanting to woo the Indian investors having failed to lure domestic ones. Incidentally, the ADR/GDR regime does not erect any such barrier — the size of the company is immaterial for tapping overseas market. All that is required is the Indian company should have had a consistent track record of good performance (financial or otherwise sic) for a minimum period of three years.

Equally meaningless is the precondition that the foreign company seeking out Indian investors should have declared dividend of not less than 10 per cent during each of the five years preceding the issue given the truism that what matters for the investors is return on investment (RoI). Instead, there should have been some sort of control on premium that the foreign company can charge. The IDR rules maintain a studied silence on this aspect. As a result, foreign companies may be tempted to fleece the Indian investors whose awareness levels are not at par with their foreign counterparts.

To prescribe, as the IDR Rule does, a minimum lock-in period of one year before the IDRs can be redeemed into underlying shares defies logic. This denies the Indian investors the much needed arbitrage opportunity for one full year when the foreign investors in GDR/ADR are not hemmed in by a similar restraint. The rule limiting the size of the IDR in a financial year to 15 per cent of the paid-up share capital and free reserves is apparently to pre-empt any move to treat India as a dumping ground, but foreign companies may get round this restraint by making a couple of issues each separated by a financial year.

The IDR rules incidentally provide SEBI with an opportunity to enrich itself. An application fee of $10,000 need not necessarily raise eyebrows but to charge a whopping minimum fee of Rs 10 lakh after the application is allowed could scandalise one. A fee by definition is for a stated purpose.

While a fee for processing application is understandable, a fee for merely allowing an application borders on avarice. Its legal sustainability is also in doubt because a fee without a purpose has been struck down many a time by courts.

(The author is a Delhi-based chartered accountant.)