Need for more clarity on new IDR law

WITHOUT CONTEMPT

Almost every editorial and expert comment on guidelines recently issued by the Securities and Exchange Board of India (Sebi) governing issuance of Indian Depository Receipts (IDRs) has showered praise on the assumption that IDRs are now a reality. This column will not hasten to join in.

IDRs, as conceptualised, will be rupee-denominated securities issued by an Indian depository, that evidence interest in underlying foreign securities issued by foreign issuer companies to the depository. In short, if IDRs ever become reality, foreign companies would be able to raise rupee resources from Indian investors and deploy such funds abroad.

Indian investors too would be able to freely hold foreign exchange-denominated securities if they choose to convert the IDRs into the underlying securities.

For this to ever happen smoothly, exchange controls prescribed under the Foreign Exchange Management Act (FEMA) clearly need to be amended to ensure clarity and predictability in the law for foreign issuers, and for Indian resident investors.

Until then, the recently flurry of activity around IDRs is but another signal to the world that India is taking capital account convertibility seriously.

In context, Sebi's guidelines on IDR issues tie in with the prime minister's sudden decision to re-constitute the same task force that prepared a roadmap for capital account convertibility several years ago. Immediately after the task force had then submitted the report, many Asian tiger economies were plagued by a currency crisis.

India won praise for being a gradualist with capital account convertibility, and the task force's report was tucked away. Of course, the dreaded Foreign Exchange Regulation Act was replaced by FEMA, but till date, foreign companies cannot freely raise Indian money and remit it out of India.

In fact, over two years ago, the Ministry of Finance (then through the Department of Company Affairs) had notified rules for issuance of IDRs. These rules required a foreign issuer to have a networth of at least $100 million and an average turnover of $500 million in the preceding three financial years, in order to tap Indian money.

The issuer also needed to have made profits for at least five preceding years, ought to have declared dividend of at least 10% in each of these years, and ought to have a pre-IDR debt-equity ratio of 2:1.

For IDRS to seriously be a proper means for foreign companies to raise Indian money, exchange controls should predictably and clearly provide for the terms on which Indian residents can freely invest in IDRs, convert into underlying securities, hold foreign securities accounts, and sell and hold funds abroad, or repatriate funds back to India.

Should there be unrealistic terms and conditions for such investments, foreign issuers would never want to come to India to raise funds (leaving aside questions of whether Indian savings would have the depth to fund foreign securities issuances).

Today, Indian residents are allowed to remit only $ 25,000 in a year, and there are restrictions on where such funds can be deployed, and permission of the Reserve Bank of India is necessary for a foreign institution to market its investment schemes in India.

Sebi has now inserted a chapter in the Sebi (Disclosure and Investor Protection) Guidelines (DIP Guidelines) to govern disclosures to be made by IDR issuers, and has prescribed a draft listing agreement to be signed by foreign issuers. Under the DIP Guidelines, issues have to be of a size of at least Rs. 50 crore, the issuer ought to already be listed in its home country, and IDRs and the underlying foreign securities would not be freely fungible.

It is interesting to note that when it comes to foreign issuers making IDR issues, the disclosure norms in the DIP Guidelines are proposed to be more reasonable and practical. For instance, for the first time, the concept of materiality has been brought into the norms governing disclosure of litigation.

Indian issuers have to list all sorts of litigation, regardless of materiality thresholds, and only in extremely voluminous circumstances, is aggregated disclosure permitted. One could have simply amended the existing Chapter VI and made the disclosure norms standard for all issuers, instead of carving out a special dispensation for foreign issuers of IDRs.

Of course, one should dream of not just Indian companies raising funds abroad, but also having the means here in India that enable foreign companies to raise Indian money. However, one should not lose sight of the number of Indian companies making the choice to raise money abroad instead of raising money in India. One of the primary reasons for that trend is the speed and efficiency of raising funds, the reasonableness in disclosure requirements, and better sophistication in pricing of certain types of business in such foreign markets.

There is also the inter-play of other Indian securities laws that have to be borne in mind. Foreign issuers would want clarity on crucial issues such as threshold to be maintained for continuous listing, the role played by the Takeover Regulations, the Delisting Guidelines and unique Indian concepts such as reverse book building that would come with being listed in India.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)