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Part - IV

Further, the issue should be capped at 15% of the company's post-issue net worth and the IDRs have to be denominated in Indian rupees, irrespective of the denomination of the underlying securities. Thirdly, any person residing in India, that includes any person or corporate body registered or incorporated in India, can purchase IDRs. This clearly indicates that besides individuals and companies, foreign institutional investors are also eligible to purchase IDRs. However, foreign venture capital investors and venture capital funds would be eligible to invest in IDRs, subject to certain further amendments to regulations.

Fourthly, the domestic depository will distribute dividends declared by the issuer to the IDR holders. While domestic dividends are tax-exempt for shareholders, foreign dividends are fully taxable, which implies that the IDR holders would have to pay tax in India on the same. And finally, if tax has been with held on dividends in the issuer's country, the IDR holders will have to be given tax credit for the same in India. While, sale of IDRs in India may trigger capital gains tax, there should not be any capital gains tax implications on sale of underlying shares in foreign countries, as most countries do not levy capital gains tax on non-residents.

Considering all the problems cited above, the future of IDR market in India appears to be dismal. Analysts predict that IDR route is mainly attracting small and mid-cap companies that are already familiar with the market bit due to the stringent rules and regulations most of these companies may find it impossible to tap Indian investor through IDR issues. It is expected that the foreign firms will gradually evince interest in floating IDRs as it also opens a new opportunity for foreign companies to acquire or takeover Indian companies, which in turn facilitates stock swap transactions where Indian promoters have to be offered stock in foreign companies in excess of the current limit of $25,000.

Concluded.

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