RBI, Sebi allow flexibility for IDRs; issuance cap at $5bn

Financial regulators -- RBI and Sebi --  today allowed partial flexibility in conversion of Indian Depository Receipts (IDRs) into equity shares by investors, while capping the funds to be raised through IDRs  at USD 5 billion.

The move is expected to help in attracting foreign entities to list their IDRs on domestic bourses.

"... to retain the domestic liquidity, it is decided  to allow partial fungibility of IDRs (i.e. redemption/ conversion of IDRs into underlying equity shares) in a financial year to the extent of 25% of the IDRs originally issued," the Securities and Exchange Board of India (Sebi) said in a circular.

In 2012-13 Budget, the government had proposed to allow two-way fungibility of IDRs to encourage greater foreign participation in the Indian capital market.

In a separate circular, the Reserve Bank also said there would be an overall cap of USD 5 billion for raising of capital through IDRs by foreign companies in Indian markets.

"This cap would be akin to the caps imposed for FII investment in debt securities and would be monitored by Sebi," it said.

The central bank said that the two-way fungibility allowed for IDRs are similar to the limited two-way flexibility allowed for ADRs and GDRS issued by domestic companies in foreign markets.

The two-way fungibility would enable Indian shareholders to convert their depository receipts into equity shares of the issuer company and vice versa.

The fungibility issue is seen as one of the major factors restraining foreign entities from listing their IDRs. So far, only UK banking major Standard Chartered in 2010 has come out with their IDRs.

"Suitable instructions for modifying the existing legal framework governing IDRs, in order to implement the decision to allow redemption of IDRs into underlying equity shares and re-conversion of equity shares of a foreign issuer (which has already listed their IDRs) into IDRs, will be issued separately," the circular said.

Sebi said it has been decided to prescribe a frame work for two-way fungibility of IDRs, to improve the attractiveness and long-term sustainability of such instruments.