The government is considering allowing foreign institutional investors (FIIs) to invest in Indian Depository Receipts (IDRs), which have got a lukewarm response from foreign companies so far. The move, it is hoped, will increase demand for IDRs, thereby improving liquidity in this market.

Not a single foreign company has come to the Indian market for raising capital since IDRs were introduced in 2004. One of the reason for the IDR market not picking up is the bar on FII’s and Non-Resident Indians from investing in these securities.

The existing Sebi guidelines for IDRs specify that at least 50 per cent of the issue should be subscribed by qualified institutional buyers (QIBs). FIIs are recognised as QIBs.

This is because an illiquid IDR market in the initial days may deter potential issuers from looking at India as an attractive destination. If FIIs are allowed, they will bring liquidity and enable issuers to effectively market the issue.

The issue came up for discussion at a recent meeting of the High Level Coordination Committee on Financial Markets, which was attended by all financial sector regulators and officials from the Finance Ministry. The Committee asked the Reserve Bank of India and Sebi to examine the IDR issue.

The Companies Rules and Sebi guidelines do not allow non-resident Indians and Foreign Institutional Investors (FIIs) to purchase or possess IDRs unless special permission from the Reserve Bank of India is taken.

IDRs are negotiable financial instruments issued by a local depository against the shares of the foreign company’s publicly-traded securities. IDRs have to be listed and traded on domestic exchanges like shares.

These are designed to encourage companies from neighbouring countries as well as developing counties to raise capital from the Indian market.

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