The Reserve Bank of India (RBI) is in the process of issuing a circular

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on foreign institutional investment (FII) participation in Indian depository receipts (IDRs).

As per the rules, qualified institutional buyers (QIBs) have been reserved at least 50 per cent of an IDR issue. FIIs and mutual funds being major constituents of the QIB category, their participation is crucial for the success of IDR issues.

“On the matter of allowing FIIs to invest in IDRs, it was decided at the HLCCFM (high-level coordination committee on financial markets) in its meeting held on December 22, 2008, that FIIs would be permitted to invest in IDRs and it is understood that the RBI is in the process of issuing necessary circular in the matter,” said the minutes of the last board meeting of Securities and Exchange Board of India (Sebi).

RBI comes into the picture as FII inflows are subject to Foreign Exchange Management Act (Fema).

Industry officials expect the regulators to give higher participation for FIIs in IDRs, in case the domestic participation is lower, in order to ensure that IDR issues sail through.

Already, UK-headquartered Standard Chartered Bank has revealed plans to raise around Rs 5,000 crore through an IDR issue from the domestic market.

It has appointed JM Financial and UBS AG as lead managers for the issue. Goldman Sachs, Bank of America and Kotak Mahindra are the other banks appointed to manage the issue.

Sebi guidelines permit companies to issue IDRs provided they are listed in their home market for at least three years and have been profitable for three of the preceding five years.

The norms also require the company’s pre-issue paid-up capital and free reserves to be at least $50 million and the minimum average market capitalisation during the last three years in its parent country to be $100 million or more.

The move to allow FIIs and mutual funds to invest in IDRs is aimed at widening the investor base and increase liquidity for IDRs that will be issued in India. Earlier, the government had allowed only Indian citizens to invest in IDRs.

Like Global Depository Receipts (GDRs) and American Depository Receipts (ADRs) — which Indian firms use to raise money overseas — IDRs would enable foreign firms to raise money from Indian markets. ADRs and IDRs are derivative instruments that derive values from shares deposited with

the custodian.