Understanding the Indian Legal Regime Regulating Indian Depository Receipts (IDR's)

Abstract

The past few decades have witnessed the increased internationalisation of various firms through crosslistings on international exchanges. This has been facilitated by market liberalisation, which has led to greater integration of global securities markets. Cross-border listing has become one of the avenues for the integration of global securities markets. There are two forms of cross-border listing, namely, direct listing and indirect listing. Direct listing implies that the firm concerned offers ordinary shares to the public. Indirect listing on exchanges is through Depository Receipts (DRs). Depository receipts are a negotiable certificate issued by a bank in a domestic country that represents ownership of shares in companies of other countries. Cross listing, particularly through DRs such as American Depository Receipts (ADRs) or Global Depositary Receipts (GDRs), is a popular way of internationalization among firms from emerging economies. In addition to Europe and America, International firms are allowed to cross list in other countries through the DR programme. There could be several reasons for a domestic company to cross-list, such as an expanding investor base, the desire to improve stock liquidity through its highly liquid secondary market, the increasing visibility of the company, a growing customer base, and the wish to take advantage of higher valuations. From the perspective of investors, cross listing mitigates some of the uncertainties and costs involved in making direct purchases in foreign markets. Cross listing through DRs has more advantages compared to direct listings as it offers an easier and flexible mechanism with less stringent regulations for individual companies to enter foreign markets according to their needs. The listing of a company on a foreign exchange through a DR framework exempts the firm from many stringent regulatory requirements compared to those required for direct listings on foreign exchanges, thereby enabling the investors to realise dividends and capital gains in another market. The concept of introduction of Indian Depository Receipts (IDRs) was conceived in the year 2004 but the actual action or implementation is happening only now, with the first ever IDR issue by Standard Chartered Bank which opened on May 25, 2010 and closed on May 28, 2010. The Central Government, in exercise of powers available with it under section 642 read with section 605A of the Companies Act, 1956 had prescribed the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number GSR 131(E) dated February 23, 2004. The said Rules provide, inter alia, for eligibility for issue of IDRs, procedure for making an issue of IDRs, registration of documents, conditions for the issue of prospectus and application, listing of IDRs, procedure for transfer and redemption and other conditions related to the same. It has also been provided in such rules that an issuing company shall also fulfil the eligibility criteria laid down by the Securities Exchange Board of India (SEBI) from time to time in this behalf. The SEBI, in view of authorisation available to it under IDR Rules, had originally issued a Circular No. CFD/DIL/IDR/1/2006/3/4 dated April 30, 2006 through which it has specified the Model Listing Agreement for listing of IDRs and subsequently the SEBI simplified the said Listing Agreement vide its Circular dated June 16, 2009.