The Hindu Business Line : Have IDRs arrived?

With the Securities and Exchange Board of India having inserted provisions dealing with Indian Depository Receipts (IDRs) in its Standard Listing Agreement, the decks have been cleared for foreign companies wanting to tap the Indian capital market. Curiously, SEBI has bestirred itself more than two years after the Department of Company Affairs made the Companies (issue of Indian Depository Receipts) Rules 2004. That the IDRs have to be denominated in Indian rupees in terms of 6(iv) of the above Rules should squelch any notions of the move having something to do with the comfortable foreign exchange position of the country.

The IDRs are for Indian residents if one may say so just as GDRs issued by Indian companies abroad are designed to tap funds from non-residents abroad. For good measure, Section 47(viia) confers exemption from capital gains tax when GDRs are transferred outside India by one non-resident to another. By inserting this specific exemption, Parliament has ruled out any possibility to tax the foreign transaction on the ground that the GDRs are after all rooted in and convertible into shares of Indian companies that have issued them. Equally obvious is the tax treatment of IDRs issued to residents of India who can buy and sell them on the Indian bourses — the resultant income is income earned in India attracting the Indian tax liability under Section 5.

No soft treatment

Parliament decided two years ago to spare long-term capital gains earned by selling equity shares on the Indian bourses completely from tax liability. Similarly, it also decided to tax short-term capital gains at 10 per cent flat. It simultaneously introduced a Securities Transactions Tax (STT), which admittedly is a soft impost. Will this regime be applicable to dealing in IDRs? The answer is in the negative given the fact that both Section 10(38) conferring exemption to long-term capital gains and Section 111A leaving short-term capital gains with just a slap on the wrist expressly use the words `equity shares'.

In the absence of specific reference to IDRs, income from this new instrument does not make the grade for the aforesaid benevolent treatment. Till the law is amended, long-term capital gains from transfer of IDRs would be taxable at the rate of 20 per cent flat but with liberty to inflate the actual cost by the rise in the cost inflation index as prescribed or at 10 per cent at the option of the assessee sans the indexing benefit. And short-term capital gains would attract tax at the normal rates.

Scepticism

Sceptics shrug off IDRs as an instrument for which there may not be many takers. The overwhelming interest shown by FIIs in the Indian bourses would not automatically translate into similar interest for IDRs because investments by FIIs are in the secondary market, while foreign companies evincing interest in IDRs would be tapping the primary market. The mind-boggling appreciation in the secondary market is due to FIIs. But such appreciation in respect of IDRs would go to the Indian resident investor with the foreign company itself not getting to savour it. Only time will tell whether IDRs have arrived.

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

S. Murlidharan

More Stories on : Taxation | Overseas Borrowings | Insight

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Towards a partnership

The Pascal pressure

A case of seizure logic that suffered serious seizures

Taxpayers' nightmare

Conflict between `heads'

Have IDRs arrived?

Why FDI caps must go

Oily skid is just dangerously around the corner