A Study About Indian Depository Receipts Finance Essay

The era of globalization has brought about a storm of change that has overturned almost every aspect of business and trade. It has affected every industry, every sector, every nation and every economy, giving rise to the concept of the world being a global village, where there are no boundaries.

With the advent of globalization, there is a need amongst the investors to expand their horizons beyond their local security markets.

Indian Depository Receipts, or IDRs, are a result of this phenomenon. It is a rupee-denominated, derivative financial instrument that allows foreign firms to raise capital in India. The need for international diversification of an investor's portfolio has driven the formation of this financial instrument. The rising economy of India is making India an irresistible investment playfield for investors throughout the world.

Although IDR is not very different from other financial instruments, it has its own set of merits and de-merits. It allows firms to broaden and diversify their investor base, thereby promoting a global image for the firm.

Although its American counterpart American Depository Receipt (ADR) has been there since the 1920s, IDR is relatively young, being born in 2004, and even then it was widely unpopular due to the rigid conditions RBI had put on the applicant firms. It was only after the changes made in the ruling in 2007 that the concept of IDRs gained momentum, with Standard Chartered becoming the first firm ever to apply for registration of IDR issues in April 2010.

A lot remains to be seen about the future of IDRs and the role they play in the Indian Economy.

This paper gives the reader a simplified insight into the inner workings of IDRs, what they are; how they are issued, their pros and cons for both individual investors as well as institutional investors; all of this minus the superfluous and baffling technical jargon.

Section 2 deals with defining what IDRs are and why they are needed, while section 3 deals with the history of IDRs. Section 4 deals with a brief overview of the whole process of issuing and registering for issuance of IDRs. Section 5 deals with the advantages and disadvantages of IDRs and section 6 deals with a comparison of IDR with its American counterpart. Section 7 provides an insight into the Standard Chartered story: the first ever firm to register for an IDR issue. Lastly section 8 deals with the future prospects of IDRs, what it can do for investors and the Indian Economy. Section 9 and 10 provide the conclusion and references respectively.

2. Indian Depository Receipts

As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, an Indian Depository Receipt is defined as:

" A rupee-denominated financial instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company."

The concept and the need for IDRs can be best understood with an example. Say, Mr A, an Indian investor, wants to invest money in AutoNation, a US company listed on the New York Stock Exchange. The traditional method for investing would be to contact a broker of NYSE and deal with him. But it is not as simple as it sounds. Mr. A will have to face a lot of obstacles such as unstable settlements, fluctuating currency conversions, unfamiliar market regulations, unreliable information channels and perplexing tax conventions and internal investment policies. All of these are more than enough to put even the most experienced investors off their game, which defeats the whole point of them investing in foreign markets in the first place.

What IDRs do, is allow people like you and me (assuming both of us are blind as a bat when it comes to finance) to invest in foreign companies and diversify our portfolio, without the aforementioned hassles.

When a foreign company, like AutoNation, wants Indian investors (like Mr. A) to raise money, it will use Indian Depository Receipts (IDR). An IDR will represent underlying shares of AutoNation, but will be denominated in Indian currency. Just like the shareholder of a regular equity, Mr. A will own a part of AutoNation, and will be entitled to dividends, rights issues and other such payouts that AutoNation issues.

The basic purpose behind IDRs is to achieve Cross listing. A foreign company will have the primary listing on its domestic exchange (like NYSE or LSE) while its listing on the NSE or BSE will be secondary.

An IDR has to be listed on Indian stock exchanges (like BSE and the NSE), and can be traded like regular equity shares. It allows people to invest in foreign companies without trying to scrutinize every intricacy of the trading laws and practices in that country. Also, since it is rupee-denominated, there are no hassles regarding currency conversions and fluctuating rupee values.

CONCLUSION

The internationalization of stock markets due to globalization has driven a large number of countries (both developed and developing) to unbolt their stock markets to foreign investors and to relax their previously stringent laws restricting their citizens from investing abroad. Indian markets are taking a dynamic role in this transmutation through IDRs. Undoubtedly, India has enough depth in its security markets to attract sizeable investor interest for IDRs. But problems like an unfavourable, stringent regulatory environment, difficulty in accessing markets, fungibility issues, instability of policies, etc., provided substantial hindrances to the growth of IDRs in India. Certain positive steps by SEBI like the amendment of the previous regulations and a decision to reserve almost 30 % issues for retail investors has made IDRs catch attention of global giants. It has started with Standard Chartered Bank getting a green light to Rs 50 billion through an IDR issue in 2010. It will be interesting to see if this will be an indication towards other foreign companies entering the IDR market.

A Study About Indian Depository Receipts Finance Essay

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