Sebi road map for illiquid IDR redemption

In its attempts to make Indian Depository Receipts (IDRs) more investor- friendly, the Securities and Exchange Board of India (Sebi) has put in place a framework that will allow such investors to redeem the instrument if it becomes illiquid. Till now, the norms were silent on the recourse available to investors if there was no trading in IDRs of any particular entity.

IDRs are shares issued by foreign companies and are listed on the Indian exchanges. It basically gives Indian investors an opportunity to own a share of a foreign company. Currently, Standard Chartered Plc, which is listed on London Stock Exchange and Hong Kong Stock Exchange, is the only entity that listed its IDR in India. The global banking major came out with its IDR issue in May 2010 and was listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in June 2010.

Investors, however, can redeem IDRs only after one year of its issuance and if it is not frequently traded on the stock exchanges. “After the completion of one year from the date of issuance of IDRs, redemption of IDRs shall be permitted only if IDRs are infrequently traded on the stock exchange(s) in India,” said the Sebi circular.

According to Sebi norms, IDRs will be termed “infrequently traded” if the annualised trading turnover during the six calendar months immediately preceding the month of redemption is less than five per cent of the listed IDRs. The issuer company will have to check the frequency of trading on a half yearly basis ending on June and December of every year.

The circular further explains that the IDR holder can ask the domestic depository to redeem shares and transfer the money to his account. Since the underlying shares of an IDR are listed on overseas exchanges, the transaction will be subject to the laws related to foreign exchange.

“A holder of IDRs may transfer IDRs or may ask the Domestic Depository to redeem these IDRs, subject to the provisions of the Foreign Exchange Management Act, 1999 and other laws for the time being in force,” it says.

The recourse assumes significance also because of the fact that the IDRs are not fungible into the underlying equity shares of the issuing company. A circular dated July 22, 2009, issued by the Reserve Bank of India (RBI) clearly says that “automatic fungibility of IDRs is not permitted”.

If IDRs are found to be “infrequently traded”, then the issuer company will have to make a public announcement and investors will have to submit their application within 30 days. The redemption process will have to be completed within 30 days of the receipt of the application.