The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have paved the way for limited two-way fungibility for Indian depository receipt (IDRs) through circulars on 28 August. The regulatory framework governing IDRs now enables the conversion of a foreign issuer’s equity shares into IDRs, which was previously not allowed. Other important regulatory changes are outlined below.
Cap on redemption and conversion
The circulars have introduced a cap of 25% of the originally issued IDRs as a maximum limit for redemption/conversion in a given financial year. This means that in any given financial year a maximum of 25% of the originally issued IDRs may be redeemed or converted into underlying equity shares of the foreign issuer whose IDRs are listed. This is subject to the requirement that the IDRs are held for a period of at least one year.
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Eligibility and fundraising limits
The requirement for an IDR to be “infrequently traded” to be eligible for redemption has now been removed by SEBI.
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The RBI has stipulated that a maximum of US$5 billion in capital can be raised through the IDR mechanism.
Investors must comply with the conditions enumerated in regulation 7 of the RBI circular dated 22 July 2009, which provides guidelines for holding underlying equity shares of an issuing company after redemption of IDRs by listed Indian companies, domestic mutual funds and other persons resident in India.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
