The Indian depository receipt or IDR is finally going from concept to reality. Work on IDRs started all the way back to 2004 when the Department of Company Affairs notified the issue of Indian depositary receipt rules. Then not much happened till 2006 and that’s when Sebi identified new guidelines. There was some relaxation in the rules in 2006 but it has been two-years since then and the IDR concept has yet to 9umtake off. What has taken it so long? What's yet to be done? How will IDRs work and are foreign companies really interested?

The Firm spoke to a few guests:

Q: Are we really anywhere close to the first IDR issue really?

Ashvin Parekh, Head-Global Financial Services, Ernst & Young: It looks a little away. It seems to me that some more clarification in regards to some of the aspects on IDRs is really awaited by the investor community on one side and the issuers on the other side. The participation, the taxation related issues, issues associated with the lock in period – things like those. So there is more clarity required.

I would raise a very fundamental question and that is who will it really be targeting?

Q: What kind of companies – I am not even get to the investors first – what kind of foreign companies would actually be even interested in this product and why is the investment banking community so excited about it because last few weeks the only buzz we have been hearing is IDRs – it almost seems like there is an issue on the anvil?

Chetan Savla, Head of Equity Product Group, Kotak: From an issuers perspective I will say that let us look at four potential objectives that an issuer can achieve through an IDR issuance for a foreign company – local capital – less of a reason. I don’t think most foreign companies are going to come to India for incremental capital.

Second reason is if they have a large employee base in India, possibility of giving ESOPs which are based on the local IDR – good enough reason if the employee base is large. So BPO companies or IT companies which have a base over here possibly.

Third is local branding and then are companies where they have a large consumer business in India or consumer durable business in India or anything that touches a large number of Indians – a listing adds to that branding over here and that could be one of the reasons.

Lastly, potentially of creating currency in the Indian market for an Indian acquisition or acquisition of any business or assets in India. So these are the four reasons. I don’t think capital is the key reason. The other three could be the real reason why something like this could happen.

Q: Are you seeing a line of foreign companies at your door at Kotak?

Savla: I don’t think there will be a line of companies ever. It will be more like – some company will obviously have to take the first step and as I was sharing with you sometime back – it took two-years for the book building guidelines for the first company to come and then its seen flood. We won’t see a flood in terms of number of companies here but we will see large issues from whoever comes and does an IDR issue and then we will see a decent number of issues happening over here. How many companies do ADR issues overseas or GDR issues? So the number of companies is actually not going to be much.

Q: Answer the other part of this question because you are part of the other part of the community that is equally excited about these products. Who will want to buy these IDRs? Why would investors be interested in them?

Ravi Kapoor, MD & Head, Capital Markets, Citi India: I guess any new product takes time and they were obviously in the old version of the guidelines there were a few things which were quite stringent and therefore not many issuers could take advantage of the fact.  But now it seems like to me that regulators are very keen to listen to the potential issuers and amend those guidelines so as to give Indian investors – either could be institutional investor or retail and HNI – another asset class to invest into. I think over a period of time if most of the hurdles are resolved it should be an acceptable product.

Q: Why in India would domestic institutions, retail investors, high net-worth investors be interested in IDRs?

Kapoor: it gives you diversity into equity portfolios. This is a very similar situation, why would a retail investor like to buy in the Indian ADR or a GDR.

If we go back into times, there were MNC companies which were asked to list at some point in time and Indian investors really got benefited, they bought that stock, they kept it and they made big returns out of that.

Q: You spoke of certain parts of those guidelines that still needs fixing or fine tuning for everyone to come on board. Can you identify two-three key things that still need to be done - I have on my list the fact of whether a foreign institutional investors will be allowed to invest in this product or not and I want to know if that is really a material decision and also the issue about redemption and repatriation and then as Mr Parekh brought up as well, the issue of tax treatment. How are these products going to be treated, are they going to be treated on power with regular equity products in country?

Kapoor: There are two-three things, the first is the repatriation. I think clarity has to be given as to whether the capital raised through the issuance of IDRs can be repatriated or not. I think that is most important otherwise if the issuers raise capital and keep it in the country, it may not be that effective.

Secondly, to my mind the order of priority would be the taxation. If the Ministry Of Finance/CBDT (Central Board of Direct Taxes) allows this product to qualify for STT (Securities Transaction Tax) and therefore all the long-term and the short-term capital gain exemptions, which are applicable to the stock securities are applicable to IDR as well, it could become an attractive product from the issuer’s point of view as well as from investor’s point of view.

Thirdly, I guess the fungibility. I give high importance to these three things rather than anything else. By fungibility, I mean I think investor should have an option to convert them into the underlying shares of that particular company in their home market and go and sell it there.

Of course, there are FEMA (Foreign Exchange Management Act) regulations which surround that but we should also understand that the Reserve Bank of India (RBI) has over a period of time relaxed guidelines and enabled Indian investors to invest through either mutual funds, offshore mutual funds or under the USD 200,000 limit, which they have opened up for each individual in every financial year to invest into foreign assets.

So I think within that construct if the fungibility could also be established so that the Indian investor is not holding any illiquid paper, that will be great.

Q: Liquidity is going to be the key issue for these products here in this market, right?

Savla: Liquidity is very important because to the extent that the paper is issued in India and as the current guideline stand, there is a restriction on fungibility for one year - even after one year it is not automatic – only after one year you can apply for redemption. One of the advantages if I may say of that restriction is that it will keep the local liquidity intact. To that extent it is obviously helpful but in the longer run if markets are going to be fungible, it is better that there is fungibility between the two markets. To that extent if the Indian investor is able to sell here or sell abroad he has got access to liquidate it at either places.

Q: Is it going to be moot issue with the foreign institutional investors are allowed to buy IDRs are not because we are still waiting final decision on that?

Parekh: To a certain extent it will be. If you have significant shareholders who have presence in the equity of these companies and if they want to keep their percentages of holding intact then they might participate in the IDRs. But I will go back to my fundamental question once again and there is a question I would like to raise once again with Chetan and with Ravi – even with this USD 2,00,000 of limit that we have there is for the individual investor and High Net Worth Individuals – a clear road to invest outside India in the equity of these companies; we haven’t seen much of an investment in that area at all. Why would I then therefore participate in IDR? Is a very fundamental question I keep on raising?

Q: You want to respond on that?

Savla: I will add a dimension to it that there are approximately 1.38 crore demat accounts in India which approximately probably represents 1-1.25 crore individual investors who are looking at the equity markets. When they are investing on the Indian stock exchanges they have access to information about the company which they don’t have about the foreign companies so when an IDR gets listed here and there is regular flow of information, there is regular coverage by brokers, and there is focus on the product; it will give them the information to invest. Second, it’s easier to invest on the Indian stock exchange. I am not sure that most of these people are even aware of how to invest in the market.

Q: What the IDR market to begin with at least for the first six months, one-two years. Be a domestic institutional market before it becomes a retail maybe HNI and domestic institutional but not mass or retail in any fashion?

Savla: On the contrary. I would go back to the point that Ravi made – there is a MNC (Multinational Company) flavour with Indian retail which has been historically there. Now you have an opportunity to invest in that same company’s parent with a global footprint maybe over multiple countries. So the name is going to evince a lot of interest.

Q: How many months before we see the first issue since all of you are so excited at least Chetan and you are so excited about it and you want to hazard any guesses on who will be the first issue?

Kapoor: I just want to say three things; first of all Mr Parekh’s question of the success of USD 200,000 scheme as well as the offshore mutual funds. I agree with Mr Chetan, only dimension I want to add is that I think we have to understand the psyche of the Indian retail investor. He wants to hold something which is in his demat account, he wants to trade something which trades in his time zone and run on their own exchange, he wants advise on that from his wealth manager or his broker whether he should buy or sell. I think these all features kick in once the IDRs are available to them in India in their markets which are tradable and which they can hold.

The second thing is that it is an evolving product. It is product which has got two-three revisions of the guideline and we think that regulators are still looking at some of the regulations which are not enabling this product to get off the ground.

Parekh: I am a little skeptical, I continue to maintain that. Somewhere it is linked to CAC (Capital Account Convertibility) and I think till the government makes up its mind and the regulator makes up its mind on CAC, this will be a product in limbo.

Anchor: But law firm Amarchand Mangaldas which had conceptualized the IDR says the first issue is not far away.

Cyril Shroff, Managing Partner, Amarchand Mangaldas: In IDRs there are many international issuers who are looking at this. Secondly and most importantly we are finding a lot of regulatory enthusiasm. We know certain facts that Sebi is very excited about this and is going out of the way to help so is the government of India. So once you have that kind of regulatory traction, it improves the probability of an early transaction a lot.