The Indian Depository Receipt – An easy way to make global investments

A Depository Receipt is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company.( Source: www.investopedia.com ).

An IDR (Indian Depository Receipt) is issued by a foreign company raising funds from the Indian market. IDRs are rupee-denominated and created by a domestic depository against the underlying equity shares of a foreign company. Sounds complicated? Let’s explain with a live example from our markets.

Very recently Standard Chartered Bank which is a foreign company listed in the UK issued its first IDR in India. Effectively it purchased its own shares listed in UK ,deposited the same with a custodian -The Bank of New York Mellon ,on behalf of a Indian depository which is Standard Chartered Bank, Mumbai and against every 1/10 Standard Chartered share issued 1 IDR to Indian investors . Thus the Indian investor does not directly buy equity of StanChart, but buys one receipt that represents one tenth of its share. Since the IDRs are listed on the exchanges, one can also buy and sell the IDR through a stockbroker, just like any other regular equity share.

In our example StanChart has not issued fresh equity but used existing shares to issue IDR. It can however also issue fresh equity if it so wishes subject to regulation and compliance requirements here in India.

The best part about IDRs is that it allows Indians to invest in overseas equity over and above $ 200,000 limit set by RBI for overseas investments. One can convert IDR back to the underlying equity subject to RBI permission and conditions mentioned in the offer document.

Why would a foreign company want to issue an IDR? For one ,such an issue can boost its prestige not only here in India but also abroad, and promote its brand value. It opens up the Indian capital market as a potential place to raise funds for future needs without having to create a listed entity incorporated in India. It also allows stakeholders in India (employees, customers etc) an opportunity to invest in the business. For Example Stanchart Bank derives almost 12 % of its revenues from India. An IDR gives an opportunity to its clients in India to invest in a bank that they are closely dealing with. Companies can also reserve a part of the IDR for employees working in India as a step towards retaining and rewarding talent.

For investors currency risk and tax are two issues that need to be weighed. Since the IDR will reflect prices of the stock listed in its original stock exchange converted into rupee, even if stock prices remains stable, you could lose money should the rupee appreciate. But it works the other way too . If the rupee depreciates you make more returns on your investments.

Dividends and short term gains (since IDR are not subject to STT) are fully taxed at the highest marginal rate of tax applicable to you. Long term gains are also taxable at 20 %.

The StanChart issue is a first in India, and we may see many more IDR issues in the future. When global companies are available at attractive valuations in the comfortable confines of known regulatory, banking and settlement conditions it is an opportunity for investors to diversify risk with minimum hassles. The benefits of diversification far outweigh risks and tax costs provided the business and value is right.