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| FIIs, funds can invest in IDRs, says Sebi |
| BS Reporter / New Delhi Apr 14, 2009, 00:05 IST |
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Market regulator Securities Exchange Board of India (Sebi) has permitted foreign institutional investors and mutual funds to invest in Indian Depository Receipts (IDRs).
The move to widen the investor base will increase liquidity for IDRs that will be issued in India. Initially when IDRs were introduced, the government allowed only Indian citizens to invest.
Further, the board of Sebi also decided to permit the issue of depository receipts by custodians on behalf of issuers, and demat holding of IDRs. Further details were not available as the board members did not brief the media after their meeting in New Delhi.
Just like American Depository Receipts (ADRs), where Indian companies raise resources from overseas market, IDRs would enable foreign firms to do the same from Indian markets.
ADRs or IDRs are derivative instruments, that is, they derive their value from the shares deposited with the custodian.
Basically, the foreign company will deposit shares with a custodian, who in turn will issue depository receipts based on these shares. The receipts are issued based on the ratio of how many shares equal a single depository receipt.
IDRs have not picked up because the overseas firms faced regulatory hurdles since India does not have full capital account convertibility. Taking money raised from India would have required multiple approvals from authorities like (Foreign Exchange Management Act) FEMA.
Another reason cited for the poor response was the limiting of investor base to include only Indian residents. However, by allowing the foreign portfolio investors to invest in IDRs now, the government is trying to attract foreign capital and also make IDRs more attractive for overseas firms, said a capital market consultant.
However, FII’s have pulled out more than $14 billion out from the Indian capital markets in the financial year 2009. But in the last few weeks, they have been net buyers on certain days.
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