The Securities and Exchange Board of India (SEBI) has dealt a blow to foreign investors with an announcement that Indian depository receipts (IDRs) cannot be redeemed into underlying equity shares unless the IDRs are infrequently traded on stock exchanges in India.
Previously, IDRs could be freely redeemed against the transfer of underlying equity shares, without the requirement of any prior approval from the RBI after the lock-in period had expired.
Now, even after the one-year statutory lock-in period has passed, IDR holders can only redeem equity shares if the IDRs are “infrequently traded” on stock exchanges. IDRs are considered infrequently traded if their trading turnover during the six months before the month of redemption is less than 5% of the listed IDRs.
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The issuer company is required to test how frequently IDRs are traded on a half-yearly basis ending in June and December each year. The issuer company must notify the stock exchanges and publish in an English and a Hindi newspaper with wide circulation, in the prescribed format, the details about the IDRs being infrequently traded, when the redemption application will be submitted and what approach will be used to process the application. The announcement should be made within seven days after the half year ending in June or December.
IDR holders have the option to redeem their IDRs by submitting their application to the domestic depository within a period of 30 days from the date of their public announcement. The redemption process should be completed within 30 days after the application has been received. After redemption, the domestic depository must inform the concerned stock exchanges of the revised shareholding pattern of the issuer company within seven days following the completion of the redemption process.
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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.
