Immediate repatriation of money raised; 1-yr lock-in for conversion into equity.
In order to encourage foreign companies facing fund crunch globally to raise resources from Indian markets, the Reserve Bank of India (RBI) has issued guidelines that will allow them to issue Indian Depository Receipts (IDRs).
However, the resources raised through IDRs will have to be repatriated immediately.
The guidelines could prompt several foreign companies such as Standard Chartered Bank to raise money through IDRs. The bank has already gone on record to say that it will be interested in exploring this option.
The guidelines would allow companies outside India and foreign financial or banking companies with presence in India, either through a branch or subsidiary, to raise funds through IDRs. But they would require the approval of regulators concerned, such as RBI, Sebi and Irda, before issuing IDRs.
Also, IDRs, which will be denominated in Indian rupees, will not be redeemable into underlying equity shares before one year from the date of issue. So, the lock-in period is one year.
There won’t be any automatic fungibility of IDRs. That is, companies will not be allowed to purchase any property or assets in India using the resources.
Mutual funds investing in IDRs may either sell or continue to hold the underlying shares as per Foreign Exchange Management Act (Fema) guidelines. Individual investors can only hold the shares for the purpose of sale within 30 days from the date of conversion.
IDRs, an equivalent of Global Depository Receipts (GDRs) or American Depository Receipts (ADRs), are receipts issued by a foreign firm to raise funds from the Indian capital market. These receipts are eventually redeemed into shares of the company.
Bankers explained that this was the right time to operationalise this instrument. At present, many smaller international companies are finding it difficult to raise funds from the US and European markets due to risk aversion following the dollar crunch and the global economic slowdown.
“Also, subsidiaries of Indian companies and banks abroad, which were finding it difficult to raise dollar resources, may also get to raise funds through this route,” added bankers.
The government had announced the introduction of IDRs, denominated in India rupees, in 2004. However, the new RBI guidelines will now operationalise it by making necessary changes in Fema.
RBI has also allowed Foreign Institutional Investors (FIIs), including Sebi-approved sub-accounts, and Non-Resident Indians (NRIs) to invest, buy, hold and transfer IDRs.
NRIs will also be allowed to invest in IDRs out of funds held in their NRE/FCNR(B) accounts, maintained with authorised dealers/banks. NRE or FCNR (B) accounts are Indian rupee and foreign currency denominated deposit accounts, respectively.
