Indian depository receipt(IDR)

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Transcript of Indian depository receipt(IDR)

What is Indian Depository Receipt (IDR)?

Indian Depository ReceiptsWhat is Indian Depository Receipt ?.What happened before IDRs were introduced?3Features of IDRsWhy do you need an IDR?An IDR is meant to diversify your holdings across regions to free you from a region bias or the risk of a portfolio getting too concentrated in the home market.

You need to study the firms financials before you buy its IDR.

However, since these IDRs are listed, bought and sold on the Indian markets, the impact of global markets and exchange-rate risks are reduced, though not totally eliminated.

What is the security of the underlying shares? Where will the receipts be deposited?How will IDRs be Issued? Who can Participate?..Parties Involved & their RolesIntends to raise capital in IndiaMust be listed in its home countryIndian entity appointed by the issuer company and registered as a custodian of securities with SEBIIssues IDRs and serves as the trustee on behalf of the shareholdersHolder of equity shares on behalf of the Domestic depositoryAppointed by Domestic DepositoryProvides services to the issuer company, the Domestic Depository and the IDR holdersServices - Keeping records of the IDR holders, coordinating corporate actions, and handling investor grievancesEligibility Criteria9Is there a Currency Risk?In theory, the price of the underlying share of the international firm at the foreign exchange and the exchange rate would play a role in determining the price of the IDR on the domestic exchange.

But, in practice, this may not play out fully because the IDR would need to be bought and sold in Indian rupees and its price discovery would happen based on demand and supply, just like any other equity share.

Dividends declared by the firm will be distributed in foreign currency and this would be then converted to Indian rupees at prevailing exchange rates.What are the Benefits that Indian Investors can look forward to?Will Indian Investors get Equal Rights as Shareholders?

Can IDRs be Converted?IDR holders will have to wait for a year after issue before they can demand that their IDRs be converted into the underlying shares.However this conversion is subject to certain conditions:

PROSCONSDisclosure & Investor Protection (DIP) Guidelines

Part-I General requirementsA. ELIGIBILITY FOR ISSUE OF IDRs No issuer shall make an issue IDRs unless:

It is listed in its home country; it has not been prohibited to issue securities by any Regulatory Body it has good track record with respect to compliance with securities market regulations.

INVESTORS Investments by Indian Companies in IDRs shall not exceed the investment limits, if any, prescribed for them under applicable laws.Automatic fungibility of IDRs is not permitted.(In every issue of IDR At least 50% of the IDRs issued shall be subscribed to by QIBs; The balance 50% shall be available for subscription by non-institutional investors (i.e., investors other than QIBs and retail individual investors)and retail individual investors, including employees.

C. MINIMUM ISSUE SIZE: The size of an IDR issue shall not be less than Rs.50 crores

MINIMUM SUBSCRIPTION:

(i) Following statement shall appear for non-underwritten IDR issues:If the issuing company does not receive the minimum subscription of 90 percent of the issued amount on the date of closure of the issue, theissuing company shall forthwith refund the entire subscription amountreceived. If the issuing company fails to refund the entire subscription amountwithin 15 days from the date of the closure of the issue, it is liable to pay theamount with interest to the subscribers at the rate of 15 per cent per annumfor the period of the delay.

(ii) Following statement shall appear for underwritten IDR issues:"If the issuing company does not receive the minimum subscription of 90 percent of the net offer to public including devolvement of Underwriters within 60days from the date of closure of the issue, the issuing company shall forthwithrefund the entire subscription amount received with interest to the subscribersat the rate of 15 per cent per annum for the period of the delay beyond 60days.PART II - DISCLOSURES IN A PROSPECTUS FOR IDRsGENERAL INSTRUCTIONS WITH RESPECT TO CONTENTS OF THE PROSPECTUS:

The contents of the prospectus include the financial statements of the issuer company, its subsidiaries and associates which shall be in plain English.

The prospectus shall contain all material information which shall be true and adequate so as to enable the investors to make informed decision on the investments in the issue.

The issuing company shall, through a Merchant Banker, file a prospectus certified by two authorized signatories of the issuing company, one of whom shall be a whole-time director and other the Chief Accounts Officer or the Chief Financial Officer, stating the particulars of the resolution of the Board or the shareholders by which it was approved, with the SEBI and Registrar of Companies, New Delhi, before such issue.B. THE ISSUE Summary of the terms of offer shall be incorporated, including:Offer and Listing DetailsPlan of DistributionMarketsSelling Shareholders, if anyDilutionExpenses of the Issue C. FORWARD LOOKING STATEMENTS A paragraph on the statements that are forward looking statements and not matters of historical facts shall be incorporated. A statement on the sources of data used in the prospectus and their accuracy shall also be incorporated on whether these have been independently verified

D. OBJECTS OF THE ISSUE / USE OF PROCEEDS The following shall be disclosed:

purpose of the issue;break-up of the cost of project for which the money is raised through the IDR issuethe means of financing such project; andproposed deployment status of the proceeds at each stage of the project.E. CAPITAL STRUCTUREAuthorized, issued, subscribed and paid up capital (Number of instruments, description, aggregate nominal value).Size of present issue.Paid-up Capital:- before the issue;- after the issue (if the IDR issue involves issue of fresh equity shares); and- share premium account (before and after the issue)iv. Detailed notes to Capital Structure

Capital Structure shall also contain details regarding holdings of major shareholdersi.e., the person or persons who are in over-all control of the company.FINANCIAL INFORMATION Prospectus shall contain the following:(a). Report of Auditors on the Financial Statements(b) Balance Sheets(c) Statements of Income(d) Schedules to Accounts(e) Statements of Changes in Stockholders Equity(f) Statements of Cash Flows(g) Statement of Accounting Policies(h) Notes to Financial Statements(i) Statement Relating to Subsidiary Companies (in case ofunconsolidated financial statements)(j) Related Party transactions(k) Liquidity and Capital Resources.

**The financial information in the prospectus shall be disclosed in the issuing companys functional currency/reporting currency/national currency and the reporting currency shall be restricted to Sterling Pound/Euro/Yen/US Dollar.21G. DESCRIPTION OF THE INDIAN DEPOSITORY RECEIPTS AND RIGHTS OF IDR HOLDERS

Brief description of the Indian Depository ReceiptsDividends, Other Distributions and Rights of IDR holdersVoting rights and their manner of exercise by IDR holders, if any.Record dates and how the same will be disclosed.Reports and other communication to which the IDR holders will be entitled.Conversion procedure of IDRs into sharesGoverning Law regarding various aspects of IDRs and transactions therein.Some Other Important Content in the prospectus:IDR Market StatisticsStatisticDescriptionNumber of IDRs1CompanyStandard Chartered (STAN)Listing DateJune 1, 2010Number of Shares Offered240,000,000Issue SizeRs. 2,486.35 CroreIssue PriceRs. 104Listing at BSE, NSEMarket Lot200 SharesMinimum Order Quantity200 SharesIssue TypeBook BuildingIt is clear that Indias plan to replicate the ADR and GDR success story has failed to take off due to the differences in capital market regulations, quixotic policies, and their perfunctory implementation.

This also throws focus on the lack of depth and breadth of our equity markets, and the lack of risk appetite of investors for foreign assets. As of now, very few companies will like to raise funds from India, and establish their Indian association, as SCB PLC did, and gain the first-mover advantage.

With the cost of compliance increasing in the US and other global markets, India can be an alluring option for international companies to raise funds at a lower cost and with less rigorous compliance.

While the regulatory framework on IDRs has been modified several times over to meet the needs of issuers, the policy jinx needs to be broken to make the SCB IDR a success story.