Indian Depository Receipts
(IDRs): A Glimpse
Prof. Mallikarjun Bali
BLDEA’s VP Dr. P G H College of Engg &
Since April 1992, the Government of India has allowed
the Indian companies to tap the global Financial
Market and to raise equity capital from the global
investors through the issue of Depository Receipts
(DRs). In the last around 20 years, more than 100
Indian companies entered the global financial Market
and raised huge amount of equity funds. It was the
Reliance Industries that issued, in May 1992, the first
Global Depository Receipts (GDRs) in which raised
around $150 Million.
Like ADR/GDR, the IDRs are the derivative
instruments created against the underlying equity
shares of the issuing (foreign) company
Introduction to IDRs:
• These are financial instruments that allow foreign companies to mobilize funds from
Indian Capital Markets.
• IDRs are depository receipts denominated in Indian Rupees issued by a Domestic
Depository in India.
• IDRs represents interest in the shares of a Non-Indian company’s equity.
• IDRs provides a chance to the Indian investors to hold equity shares of foreign
• It is created by the Indian Depository in India against the underlying equity shares of
the issuing foreign company to raise funds from the Indian markets.
• IDRs are issued in the Demat form. However, at the option of the IDRs holders these
can be converted into physical form.
• Like equity shares, these are unsecured instruments and negotiable from one investor
to another investor
Process of Buying IDRs:
• The process of buying IDRs is same as that of buying equity
shares of Indian Companies.
• The facility of Application Supported by Blocked Amount
(ASBA) can also be used while applying to buy the IDRs. As
we know that, in the ASBA scheme, the applicant money
will not leave investor bank account till the applicant is
finally allotted the DRs. The money is blocked by banks and
continues to earn interest on it. If you are not allotted IDRs,
the money is released.
• In May, 2010 UK based ‘The Standard Charted Bank, the
first and the only entity, rose around Rs. 2490 crore
through the issue of IDRs. The bank issued IDRs at a price of
Rs. 104 per IDR and issue was subscribed by 2.2 times.
Legal Framework and Key
Issuance of IDRs will be governed by the following legislations:
• The Companies (the issue of IDRs) Rules, 2004 notified by the
Ministry of Corporate affairs on 23rd
Feb., 2004 and subsequent
amendments made thereto.
The rules provide the basic framework for issuance of IDRs.
• SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP
guidelines) and subsequent amendments made thereto.
SEBI guidelines suggest as to the contents to be incorporated while
preparing offer document.
• If issuer is a financial or banking companies having presence in
India, either through a branch/subsidiary, such entity has to obtain
prior approval from the Reserve Bank of India.
Principal Parties Involved in the Issue
• Issuer Company – The foreign company listed in their home market
seeking to raise fund through this paper.
• Domestic Depository – An Indian entity appointed by the issuer
company, registered with SEBI as a custodian of securities. This
entity, on behalf of issuing company, issues IDRs to the Indian
investors and acts as a Trustee on behalf of the IDR holders; rights
and obligations are guided by the depository agreement.
• Oversees Custodian – It is the foreign entity appointed by the
Domestic Depository, which holds shares on behalf of the Domestic
Depositary and issuing company directly hands over its shares to
• Registrar and Transfer Agents – An entity appointed by the
Domestic Depository which provides a host of services to the
Domestic Depository, Issuer Company and IDR holders. The services
includes, keeping records of IDR holders handling investor
grievances, transfer of IDRs etc.
Exhibit No. 1: Showing Issuance of
IDR Holders – FIIs,
NRIs, Retail, Non-
• As per the Companies IDR rules, as amended till date, the undernoted are the
eligibility criteria for the issue of IDRs:
Sl. No. Criteria Requirements
The issuer company should have a pre-issue capital and free
reserve of at least US $ 50 million (app. 225 crore)
The foreign issuing company should have a market
capitalization of $ 100 million or more during last three years.
Continuous trading record or history on a stock exchange in its
Parent Country for at least three immediately preceding years.
A track record of distributable profits for at least three out of
immediately preceding five years.
Fulfils such other eligibility criteria as may be laid down by
SEBI from time to time in this behalf.
As per SEBI – ICDR Regulations:
• An issuing company has to fulfill the following
Issuing company is listed in
the home country
The issuing company is not
prohibited to issue
securities by any regulatory
It has a track record of
compliance with securities
market regulations in its
Sl. No. Criteria Requirements
1 Issue Size The size of an IDR issue shall not be less than Rs. 50 crore
The minimum application amount shall be Rs. 20,000/-
3 Extent of issue
The number of underlying equity shares offered in a financial
year through IDRs offering shall not exceed 25% of the post-
issue number of equity shares of the issuing company.
Retail individual investors 30% (including NRIs)
Non-institutional investors 20% (including NRIs)
Qualified institutional buyers 50% (Except Insurance
Companies and Venture Capital funds)
Exhibit No. 2: Showing the Key IDR Related Approvals
Approval on / for
-Draft Red Herring Prospectus
-Issuance of IDRs
-Approval of IDR prospectus
-Repatriation of IDR proceeds
-In Principle approval
-Final listing and trading approval
Key IDR Related Approvals (Cont.)
• Besides, no single individuals/single
entity/group of entities in India, other than
QIBs, shall hold, directly or indirectly, IDRs
exceeding 5% of the issue. No single QIB, or a
group of QIBs shall hold IDRs exceeding 15%
of the issue.
Benefits to IDR Holders:
• As per extant law, Indian investor can make an investment in the equity shares of global companies
to the tune of only $ 2,00,000. Besides, to make investment in such equity instrument, investors
need to comply with several things: having demat account outside India to hold foreign securities,
foreign bank account to hold funds, KYC with foreign brokers, etc.
• Another way for making global investment is to go through domestic mutual funds, which are
allowed to invest in ADRs/GDRs up to 10% of the net assets managed by them, subject to the
maximum of $50 million per mutual fund.
• The limit of holding of foreign securities worth of $ 2,00,000 is not applicable to IDRs as these
denominated in Indian rupees. These instruments provide opportunities to invest in the listed
foreign entity including MNCs and conglomerate.
• Indian investors can now lower risk by diversifying their portfolio. In other words, IDRs enables
investors to diversify his holdings across regions to free from the region bias or the risk of the
portfolio getting too concentrated in the home market.
• As these instruments are listed, brought and sold on the Indian stock exchanges, the impact of
global market and exchange rate risks are reduced to the significant extent, though totally not
eliminated. As the transactions are settled according to international standards, it reduces the risk
of settlement failures.
• IDRs holders will enjoy the similar rights with that of equity shareholders except attending AGM
and voting on special resolutions.
Benefits to the Companies:
1. It helps the issuing company to boost its brand in India and target
business opportunities in India.
2. Access to Indian capital pool and opportunities for future fund
3. One of the main indicators credit analyst weigh in evaluating the
firms credit worthiness is its debt-equity ratio. An issue of IDR will
enhance firms equity and make firms debt ratio smaller, allowing
the company to qualify for credit on better terms.
4. It helps the issuing company to broaden the shareholders base.
SEBI, on 3rd
June, 2011 has issued a circular which states as follows:
1. The regulation does not permit for automatic fungibility of IDRs into underlying
equity share of issuing company. The exchange of IDRs into equity paper of issuing
company is allowed only after the completion of one year from the date of closure
of issue and that too if there is infrequently trading of these instruments in stock
IDRs shall be deemed to be “infrequently traded” if the annualized trading
turnover in IDRs during the six calendar months immediately preceding the month
of redemption is less than 5% of the listed IDRs.
2. It is the issuer company that has to test the frequency of trading of IDRs on the
half yearly basis ending on June and Dec., every year.
3. Issuer Company has to make announcement in news papers within 7 days of the
closer of the half year ending on which the liquidity criteria is tested. Besides, the
company has to inform the stock exchange(s).
4. The IDRs holders who intends to exchange their instruments into underlying
equity shares of the Issuing Company has to submit application to domestic
depository within 30 days from the date of such announcement for redemption.
5. The entire redemption process shall be completed within 30 days from the date of
receipt of application for the same.
6. After such redemption process, the domestic depository shall notify the revised
shareholding pattern of the issuer company to the concerned stock exchanges
within 7 days.
7. Person Resident in India (other than companies and mutual funds) are allowed to
hold underlying shares only for the purpose of sale within a period of 30 days from
the date of conversion of IDRs into equity shares.
The FEMA provisions shall not apply to the holding of the underlying shares on
redemption of IDRs by the FIIs including SEBI approved sub-accounts of FIIs and
SEBI circulars also states that in the absence of two-way fungibility - the ability to
purchase existing share on the London or Hong Kong stock exchange and deposit
them into IDRs programme, allowing redemption freely result in reduction of
number of IDRs listed, thereby impacting its liquidity in the domestic market.
The Indian Tax Laws contains no specific provisions for the taxation IDRs. As such tax benefits
available to listed equity shares may not be available to IDR holders.
Any dividend distributed by Indian company is subject to Dividend Distributed Tax (DDT) of
15% and as such dividend is not subject to tax in the hands of shareholders. However, in case
of IDRs as the dividend paying company is not required to pay DDT, the IDR holders are
required to pay tax at the rate applicable to them.
The trading of equity papers on the Indian Stock Exchange are subject to Securities
Transaction Tax (STT) – a levy both the buyers and sellers are required to pay tax at a
specified rates since 2004. As such any gain arising to holders of listed equity paper is exempt
from tax provided transfer must have been made after holding paper for at least for a year
other wise, such gain is taxable at 15%.
The STT was introduced in 2004 and is applicable on all transactions including purchase and
sale of equity shares in a company, purchase and sale of units of equity growth funds, sale of
units of an equity growth fund to the mutual fund and sale of Derivative instrument.
But these IDRs are not subject to STT, therefore the beneficial regime of capital gain taxation
will not be available to IDR holders. In other words, short term gains are taxable at normal
rate of tax, while long-term gain is taxable at 20% with cost indexation benefits and 10%
without cost indexation benefits (Exhibit 3 & 4).
Exhibit No. 3: Showing Tax Rate Applicable to Various
Class of Investors
Nature of Income FII (%) Non Resident
/ HUF / Association
of persons / Body of
Dividend 20 20
Progressive slab rate,
maximum being 30
30 30Business Income 40
Progressive slab rate,
maximum being 30
Short term capital
Long term capital
Exhibit No. 4: Showing Taxation of IDRs and Indian Equity Shares
Sl. No. Particulars Equity Shares IDRs
1 Section Covering Taxation 10 (38) and 111A deals with
Taxation of Gain
No Specific provision contained in the IT Act
1961 for the taxation of gain on transfer of
2 STT Applicable Not applicable
3 Capital Gain Taxation (In case of
Resident IDR holders)
Short term gain (Securities held
for less than one year)
Long term gain (Securities held
for one year or more than one year)
-Taxable u/s 111A at a concessional
rate of 15%
-Exempted u/s 10 (38)
-At normal rate of Tax (plus applicable
surcharge and education cess)
-Taxable at 20% with cost indexation benefits
and at 10% without cost indexation benefits.
4 DDT As the company distributing
dividend pay tax, the Dividend is
exempted in the hand of
As the company does not pay DDT, the IDR
holder are required to pay Income Tax at
normal applicable rate of taxation.
Taxation of IDRs and Indian Equity Shares
If IDRs are held as a stock-in-trade, it will become a
business asset and any profit made from such transfer
will be treated as business income and will be taxed
accordingly. Besides, the conversion of IDRs into equity
shares may be considered as a taxable transfer.
Under the extant Income Tax Act, any transfer
between two non-residents outside India is not treated
as transfer and such, such gain is not subject to tax.
But, the transfer of IDRs between two non-residents
outside India may be considered as a taxable transfer
and gains, if any, may be taxable in India.
• Several companies across the globe have been showing a tremendous
interest in raising capital from the International capital market to develop
an investor base and to raise international capital.
• While, American Government allowed its investors to invest in offshore
securities way back in 1927, but, the Government of India allowed the
global companies to enter the Indian market and raise capital only in
2004. In fact, until 2010, no foreign company has shown interest to raise
the fund from our capital market. It was the standard charted Bank of UK
that, for the first time, tapped our market in May 2010 and rose around
Rs. 2,490 crore by issuing the IDRs.
• IDRs are a significant step towards the internationalization of the Indian
Security Markets. While there is an effort on the part of the Government
to offer a possible diversification of markets and geographical risk, the
potential of this instrument (IDRs) may not be realized till the Government
addresses several issues which are acting as a barrier.
• Extant legal framework does not permit insurance companies to participate in the
• In fact, the Government allowed Indian companies to raise fund from the
international market by their DRs in April 1992. Initially, one-way fungibility of DRs
was allowed. Investors holding DRs were allowed to convert into underlying Indian
shares after 45 days from the closing date of issue. Under one-way fungibility, DRs
can be converted into underlying equity but vice-versa is not allowed. In Feb.,
2001, Indian Government allowed two-way fungibility in depository receipts.
• The present legal framework does not permit fungibility but only redemption that
too after one year from the date of closing of issues and also only if the IDRs are
infrequently traded on the Stock Exchange(s) in India. It is clear that the process of
conversion of IDRs into underlying equity shares is very lengthy and cumbersome.
• The Tax treatment of IDRs is not on par with other securities. It is widely perceived
that investment in IDR is not a very tax friendly instrument.
• Unless the Government addresses these issues, probably, Standard Chartered IDRs
would remain the one and the only IDR ever listed on Indian bourses.