Will IDRs ever make a comeback?

KS Badri Narayanan | Updated on August 01, 2020 Published on July 31, 2020

A few tweaks in regulations and a fresh marketing initiative can revive demand for IDRs

The only listed Indian Depository Receipt (IDR) quietly bid adieu to the domestic exchanges in June 2020. After a decade-long experiment, Standard Chartered Bank decided to delist, as the issue failed to convince both the bank and investors.

StanChart delisted its IDRs from Indian bourses from July  22. The IDRs had made a debut on the Indian bourses exactly 10 years back on June 11, 2010.

“As part of the termination programme, the IDR holders have an option to offer some or all of their IDRs under the Conversion Option and/or the Cash-out Option by submitting a withdrawal order, during the period commencing from March 18, 2020, and ending on June 15, 2020,” it had said in the delist notice. However, the details of how many people have opted for the London-listed Standard Chartered’s underlying shares or preferred to exit through the cash option offered by the bank, are yet to be ascertained.

What is an IDR?

IDR is a rupee-denominated security, listed on domestic bourses, created against the underlying shares of an overseas company. IDRs enable overseas companies to raise funds from Indian investors. Though market regulator SEBI conceptualised the idea of IDRs in 2000, only in 2010 did the first, and only, IDR take off from Standard Chartered Plc. The bank had raised ₹2,500 crore through the sale of 20.4 million receipts at an issue price of ₹104.

Domestic bourses were not able to attract any other company to raise funds from India through the IDR route. There are a variety of reasons for the lack of interest in IDRs. These include initial entry barrier, lack of fungibility awareness, tax issues and failure to popularise the product across the globe.

First, SEBI allowed only qualified institutional buyers to subscribe to IDRs and kept away retail investors. However, later it relaxed the rule by opening 50 per cent of the issue to retail investors. Similarly, the minimum application value, which was originally proposed at ₹2 lakh, was also reduced to ₹20,000 to accommodate retail investor. But by that time, interest in the product had already vanished. Some now feel even ₹20,000 is slightly on the higher side. The minimum issue size of an IDR has been pegged at ₹50 crore. Another issue was fungibility. Initially there was no fungibility, meaning one could not convert the IDR holding into overseas shares. However, in 2013, SEBI relaxed the rule allowing two-way fungibility — IDRs into overseas equity and foreign shares as IDRs. Despite that, it appears that merchant bankers, custodians and companies are yet to be convinced by this rule alone.

Need tax clarity

However, the biggest concern was tax liability. According to market experts, there were no specific tax provisions under the Income Tax Act for IDRs. Even now, there is big uncertainty on the tax implications while redeeming IDRs into underlying equity shares.

Given the long nature of our tax processing, experts believe that no specific exemption being given to IDRs under the IT Act has made it an unattractive instrument for investors.

While these are all structural issues, the biggest hurdle was creating awareness about the IDRs. SEBI, exchanges and market intermediaries have failed to popularise the product outside India.

Leveraging GIFT City

At a time when the government is rolling out the red carpet to overseas players to operate in the International Exchange at GIFT City, Gujarat, it is high time SEBI, the exchanges, and even market participants, picked up the threads and attracted overseas players into IDRs. With more brokerages now giving Indian investors exposure to overseas markets, liberal fungibility norms and entry norm relaxations may attract potential players to Indian shores for IDRs.

The government could even consider giving incentives to merchant intermediaries to popularise the product, at least to Indians and Indian-origin entrepreneurs, who need money for their overseas expansions or start-ups. SEBI could also take up the tax angle with the government to allay the fears of investors.

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Published on July 31, 2020
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