New IDR norms to favour BPOs, PE firms

The proposed easing of rules for Indian Depository Receipts (IDRs), which allow foreign entities to raise funds by listing their shares on Indian bourses, will mostly be used by Information Technology (IT), Business Process Outsourcing (BPOs) and private equity firms, said experts.

Foreign companies continue to tap American markets and it will take time for IDRs to attain a status similar to Global Depository Receipts (GDRs) or American Depository Receipts (ADRs), said industry sources.

The revised IDR norms, which are expected to be announced soon, come after no company availed the service due to stringent regulations.

Sources in the ministry of company affairs said amendments to the rules will see overseas companies needing a market cap of just $ 100 million in their home countries for the last three years, as against the existing stipulation of $ 500 million.

Further, the new rules also require the IDR-bound companies to have a pre-issue paid-up capital and free reserves of $ 50 million.

The company would have to comply with the eligibility norms of the Securities and Exchange Board of India (Sebi). The proposed amendments also require the number of underlying equity shares offered in a financial year through IDRs not to exceed 25 per cent of the post-issue number of equity shares of the company.

IDRs are touted as the Indian version of GDRs or ADRs. Experts said the Indian stock market, whose market capitalisation is hovering around $1 trillion, will have the depth to accept IDRs.

"It is going to be a good product for some sectors. Mostly IT, BPOs and private equity firms will be interested in tapping the capital markets through IDRs. Seeing liquidity in the market, it is a good time for them to raise money through the stock exchanges, said, S Ramesh, COO of Kotak Investment Banking.

As per the proposal, the actual shares underlying IDRs will be held by an overseas custodian, which will authorise the Indian depository to issue IDRs. The overseas custodian has to be a foreign bank having business in India and needs approval from the finance ministry for acting as a custodian.

The earlier norms required an IDR issue not to be less than Rs 50 crore. Also, an IDR issue should not be redeemed into underlying equity shares before the expiry of the one-year period from the issue date. Only Qualified Institutional Investors were allowed to invest in IDRs.

NRIs or FIIs cannot purchase or possess IDRs, unless permission is granted by the Reserve Bank of India. The minimum investment in IDRs, according to the earlier regulation, was Rs 2 lakh. There is a high probability that these norms will not be changed.

A managing director of a leading foreign bank who did not wish to be named said: "Though the market has a good capacity for money, IDRs will take time to be as successful as ADRs. American markets are more liquid than Indian markets. Also the breed of investors there are global."