Part - I

With globalization increasing at a fast pace, capital markets across the globe are getting integrated. India too, after liberalization, has opened its capital markets to foreign investment. Also, Indian companies are allowed to raise funds from foreign companies using ADR's and GDR's. In continuation of these capital market reforms, India has now opened its doors to foreign companies to float Indian Depository Receipts (IDRs) in the Indian stock market, taking one more step towards globalization.

This initiative is expected to help Indian investors to share a portion of wealth created by outsiders, as it is possible for Indian investor to invest in foreign companies like IBM, Microsoft, and Coco Cola, etc sitting in India, provided these companies float IDR's. Now the obvious question that come to mind are- what are these IDR's; how do they work; who issues these ADR's and also whether they will be successful in our market or not.

IDRs are equity instruments issued in India for Indian investors by the companies, which have been incorporated abroad. These securities are rupee denominated instruments. In an IDR, foreign companies issue depository receipts to Indian investors, which would in turn, issue depository receipts to investors in India. In fact, the concept of an IDR is a mirror image of the memorable ADR's/GDR's. Like ADR and GDR, it is a negotiable instrument representing underlying securities of the foreign currency. The only difference is that IDRs have to be listed on the Indian bourses rather than foreign bourses and are rupee denominated unlike ADR, which is dollar denominated and GDRs, which are denominated in any other currency.

The Department of Company Affairs and SEBI have formulated some eligibility criteria that make only robust companies to issue IDRs. According to the DCA, the company should have been making profits and should have declared a dividend of atleast 10%, in each of the five years preceding the issue of IDRs. The company should also not have a pre-issue debt-equity ratio of more than 2:1. The issuing company must have a pre-issue paid up capital of $100mn and an average turnover of $500mn.

Next

* Contributed by -
Anand Dalmia & Aditya Khemnai,
PGDM - II Year,
IIM Lucknow.