All About Indian Depository Receipt

What happens if you wish to invest in stocks of companies located overseas? You would normally have done this using your Demat account and a banking account that has funds in the country where you wish to invest. The Reserve Bank of India permits investments in equity instruments of up to $200,000. This could prove to be a complicated process.

You could also try a domestic mutual fund (MF), which invests its corpus abroad in a foreign fund. This fund invests directly in scrips or in international companies. This too can be complicated as MFs are subject to currency exchange risk. This means that your local currency investments are converted to global currency before being released on the international markets.

Then, Indian depository receipts (IDRs) emerged as a new investment option in the stock exchange. This can be an investment option to earn a long-term return. This works in a similar way to an equity share but with a few differences. Indian stock markets trade shares of Indian companies. Indian and foreign companies can be listed, but Indians must have significant Indian business to purchase their shares.

If you are looking to purchase shares in international companies such as Microsoft, Google, or Apple, Indian Depository Receipts might be a good option.

What's an Indian Depository Receipt (IDR)?

An IDR is a currency that is converted into Indian rupees. It is created by a domestic custodian of securities, who is registered with SEBI (Securities and Exchange Board of India). To allow foreign companies to raise funds through Indian securities markets, it is issued against the underlying equity. IDRs are a way to purchase shares in Indian companies that cannot list on Indian equity markets. These IDRs can be listed on Indian stock exchanges. You can directly invest in international companies using the IDRs.

These are companies from abroad that have Indian subsidiaries. These offshoots of foreign companies are not listed and offer shares to Indian investors. Standard Chartered Plc was the first to issue an IDR.

Indian Depository Receipts were based on American Depository Receipts that were introduced in 1927. The rules of IDRs were first implemented by the Securities and Exchange Board of India. Foreign Exchange Management Act was issued by the Reserve Bank of India (RBI).

Indian depository receipts were created on the BSE, and NSE on June 11, 2010, respectively.

Who can issue Indian Depository Receipts

The foreign issuing company must have at least US$ 50m in pre-issue capital and free reserves, and a minimum market capitalisation of US$ 100m during the last three years. It must have a history of trading on a stock exchange in the parent country for at most three years. It must have at least three consecutive years of distributable profits. It must be listed in its country of origin and not have been banned from issuing securities by any regulatory agency. An IDR issue must not exceed Rs 50 crores.

A custodian bank overseas is a bank that has a branch outside of India. It is based in India. It is the custodian of equity shares issued by the issuing company. Indian depository receipts will be issued against the underlying equity shares. Domestic depository is a custodian for securities registered with SEBI that are authorised by the issuing firm to issue IDRs. An Indian merchant banker is an individual who is registered with SEBI. This person is responsible for due diligence. The issuer company files the draft prospectus to issuance of Indian depository receipts with SEBI through this person.

IDR process

According to SEBI guidelines Indian depository receipts can be issued to Indian citizens in the exact same way as domestic shares. Indian residents will be able to bid in the exact same manner as Indian share buyers. The issuing process works exactly the same. The company must file a draft red herring proposal (DRHP) which will be reviewed by SEBI. The company files the document with Registrar of Companies after SEBI has approved it. The company then proceeds with marketing the issue. Investors can submit applications at the bidding centers. The issue will remain open for a set period of time. Investors bid within the price range, and the issue's final price will be determined after it is closed. As with equity shares in public issues, the receipts would be allotted to investors via their Demat accounts.

IDR Taxation and Equity Shares

There are a lot of similarities between equity shares and IDR. IDR holders enjoy almost the same rights and privileges as shareholders. Vote for or against a company and receive a dividend, bonus, or rights issue depending on when the company declares.

IDRs, however, are not subject to the same tax as equity shares. If you sell an IDR within one year of purchasing it, your IDR gains are subject to income tax. For exits after one year, the tax rates are 10% without indexation and 20% for those with indexation.

Conclusion

IDRs have currency risk, even though they offer many obvious advantages. The value of the dividend payout could be affected by fluctuations in the exchange rate. Other risks are involved, as the country in which the foreign company is located may face unexpected events like a recession or pandemic, bank failures or political turmoil. There are also risks associated with securities that aren't backed by a company. The depository receipt can be withdrawn at any time. There may also be a lengthy waiting period before the shares are sold or the proceeds are distributed to investors.