Sebi allows partial fungibility of IDRs

The move is to implement the Budget proposal of ex-FM Pranab Mukherjee

The Securities and Exchange Board of India (Sebi) on Tuesday allowed conversion of up to 25 per cent of Indian depository receipts (IDRs) into underlying shares in a year.

In his Budget speech on March 16, then finance minister Pranab Mukherjee had proposed two-way fungibility of IDRs, subject to a ceiling, with the objective of encouraging greater foreign participation in the Indian capital market.

The move is to implement the budget proposal and to improve the attractiveness of IDRs as an instrument, Sebi said. “To retain the domestic liquidity, it is decided to allow partial fungibility of IDRs (ie redemption/conversion of IDRs into underlying equity shares) in a financial year to the extent of 25 per cent of the IDRs originally issued,” Sebi said in a circular.

“Suitable instructions for modifying the existing legal framework governing IDRs, in order to implement the decision to allow redemption of IDRs into underlying equity shares and re-conversion of equity shares of a foreign issuer (which has already listed their IDRs) into IDRs, will be issued separately.”

In June 2011, Sebi had prescribed the framework for redemption of IDRs into underlying equity shares. According to that, after the completion of one year from the date of issuance of IDRs, redemption of the IDRs was permitted only if the IDRs are infrequently traded on stock exchanges in India.

IDRs are depository receipts denominated in rupees. Shares underlying the IDRs are deposited with the custodian, who holds the shares on behalf of the depository. Currently, Standard Chartered Plc is the only foreign entity that has listed its IDRs on the Indian bourses.