IDR redemption allowed only if liquidity is low: SEBI

SEBI has introduced a new condition for redeeming Indian Depository Receipt (IDR) into underlying equity shares.

The only IDR listed on NSE and BSE is that of Standard Chartered Bank. For every equity share of StanChart, 10 IDRs were issued. Standard Chartered red herring prospectus has stated that IDRs could not be redeemed into underlying shares before the expiry of one-year period from the date of issue of the IDRs.

Fungibility issues

The SEBI regulations and the RBI circular state that automatic fungibility of IDRs is not permitted. Therefore, fungibility of IDRs into the underlying shares would be permitted only after the expiry of one year period from the date of issue of IDRs and subsequent to obtaining RBI approval on a case-by-case basis.

Further, two-way fungibility, i.e., the ability to purchase existing shares on the London Stock Exchange and/or the Hong Kong Stock Exchange and deposit them into the IDR programme is not currently permitted. The RBI circular, also said that Indian residents were required to comply with FEMA at the time of redemption/ conversion of IDRs into underlying shares.

In the absence of two-way fungibility, SEBI said that allowing redemption freely could result in reduction of number of IDRs listed, thereby impacting its liquidity in the domestic market. Hence in consultation with RBI, SEBI decided that after the completion of one year from the date of issuance of IDRs, redemption of the IDRs shall be permitted only if the IDRs are infrequently traded on the stock exchange(s) in India.

Change in terms

“The arbitrage opportunity of converting the IDR into underlying and selling the same is effectively debarred,” said Mr Arun Kejriwal Founder, KRIS Research. “This amounts to a change in the terms of the issue of the IDR at the eleventh hour and coming from the regulator, this is a body blow to investors and not in the interest of future IDR offerings in this country. Probably Standard Chartered IDR would remain the one and the only IDR ever listed on Indian bourses,” he added.

Interestingly, the FII holding in Standard Chartered IDR has nearly doubled from 38 per cent on the day of listing to nearly 70 per cent in March. Retail participation has been flat through the last one year close to eight per cent.

IDRs shall be deemed to be “infrequently traded” if the annualised trading turnover in IDRs during the six calendar months immediately preceding the month of redemption is less than five percent of the listed IDRs, said SEBI.

On Trigger

SEBI further said that the issuer company shall test the frequency of trading of IDRs on a half yearly basis ending on June and December of every year. When the IDRs are considered “infrequently traded” on the above basis, it shall be the trigger event for redemption, said SEBI

The issuer company is expected to make an announcement in an English and Hindi language newspapers with wide circulation about the trigger of the redemption event, time period for submission of application and the approach for processing the applications as well as notify the stock exchanges. Such announcement shall be made within seven days of closure of the half year ending on which the liquidity criteria is tested.

IDR holders may then submit their application to the domestic depository for redemption of IDRs within a period of 30 days from the date of public announcement and redemption of IDRs shall be completed within a period of thirty days from the date of receipt of application for redemption.

After redemption, the domestic depository shall notify the revised shareholding pattern of the issuer company to the concerned stock exchanges within seven days of completion of redemption.

SEBI has directed all stock exchanges, depositories, merchant bankers, registrar to issues and custodians to comply with the circular with immediate effect.

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