IDRs to get attractive for MNC fund raising
Jun 30 2014 , Mumbai
Easier norms, new instrument on the cards
Existing rules require companies to immediately repatriate the proceeds of an IDR issue outside India. That deters a large number of potential issuers, who want to utilise the IDR proceeds within India.
The government-appointed committee, headed by MS Sahoo, secretary of Institute of Company Secretaries of India, has suggested a new regulatory framework and a new instrument, Bharat depository receipts (BhDRs), whose scope will be far beyond IDRs as defined in the Companies Act, 2013. Financial Chronicle has details of the Sahoo panel report, which was submitted to the finance ministry on June 26.
“Proceeds from BhDR issues may be repatriated or used within India and no end use restrictions must be imposed,” the committee has suggested. BhDRs will be issued against listed equities or other financial assets including debt securities, while IDRs can be issued only against equity shares.
In 2004, the government allowed foreign firms to raise funds from India by issuing IDRs. However, the mechanism remained dormant with just one issue so far, that of Standard Chartered issued in 2010.
The Sahoo panel has suggested various changes to make the IDR market more vibrant and turn India into a global financial centre. IDRs can be issued against “foreign securities that are currently available for investment by listed Indian companies, domestic mutual funds and resident Indians under the capital control regime,” the committee said.
Existing norms allow listed Indian companies to invest in shares, rated bonds and fixed income securities issued by overseas listed companies while individuals are permitted to invest up to $1,25,000 in specified foreign securities. Domestic mutual funds are also permitted to invest in shares, rated bonds and fixed income securities of overseas companies listed on a recognised stock exchange or in exchange-traded funds.
The Sahoo panel says foreign firms should be allowed to issue BhDRs against these securities.
Rajesh Narain Gupta, managing partner of SNG & Partners, a leading law firm, said there had been only one IDR issue till date under the existing framework. “This poor response indicates that the governing framework is not in sync with contemporary practices, and therefore there is a need for review. An active IDR market will benefit both Indian investors and the Indian financial system,” Gupta said.
The Sahoo committee recommends that BhDRs should be allowed for both capital raising and non-capital raising purposes.
In a capital-raising DR issue, the company issues fresh securities and the fund goes to the issuer, while in a non-capital raising issue, the issuer gets holders of existing securities to deposit those securities with a domestic custodian, and the proceeds from the sale go to the holders of the underlying securities.
Full two-way fungibility should be allowed to the extent of the issue size in case of BhDRs, the panel said. Full two-way fungibility allows an investor to convert DRs into the underlying securities and vice-versa. “This can enable arbitrage and help maintain the law of one price between the DR and its underlying securities,” the report said.
The committee says both Indian and foreign investors — retail as well as institutional —should be allowed to invest in BhDRs.
“Participation by foreign issuers in the Indian financial system will bring in the global best practices. Moreover, it will provide greater choice to Indian investors and enable them to diversify their portfolios globally,” said Mahesh Singhi, managing director of Singhi Advisors, a boutique investment banking firm.