Sunday, May 25, 2008

A Possible IDR Debut in the Indian Markets

A few months ago, we had lamented about the lack of even a single issuance of IDRs by foreign companies in the Indian markets; this, despite the relaxation of rules in 2007 to facilitate IDR listings. We had said:

“Indian Depository Receipts (IDRs) are instruments that enable foreign companies to access the Indian capital markets. It also provides avenues for Indian investors to make investments in foreign companies. In order to facilitate this process, the Companies (Issue of Indian Depository Receipts) Rules, 2004 were promulgated. Even after three years had elapsed, no single foreign company had availed on this route to access the Indian capital markets. Upon finding that the conditions for an IDR offering were too stringent, the Rules were amended in July 2007 to relax some of the conditions. However, status quo continues with no takers yet.”
This situation may possibly change with a report in The Economic Times that Standard Chartered Bank is looking to list its securities on Indian stock exchanges in the form of IDRs. VC Cirle also has a brief analysis. Such a listing would be a path breaker as far as Indian listings of foreign companies are concerned, and would open up avenues for other similar companies too. Being the first deal of its kind, it would certainly necessitate close discussions with regulators such as SEBI (being the securities regulator) and the RBI (being the regulator for banks having Indian operations as well as on the foreign exchange front).

Further, dual listings would also bring about their own sets of issues for companies to deal with. For example, Indian companies listed in the US not only have to comply with Indian corporate governance requirements, but in addition also have to follow the Sarbanes Oxley Act of 2002 as well as the rules of the exchange on which their securities are listed in the US (i.e. either NYSE or NASDAQ). Similarly, in the case of companies issuing IDRs, not only do they have to comply with listing requirements in other jurisdictions (where their securities are listed) but also with the listing agreement with the relevant Indian stock exchange. Of particular relevance is clause 49 of the listing agreement in India which deals with issues involving corporate governance (specifically board and committee structures, audit, disclosure and transparency norms and the like). This would add to compliance requirements on such companies, to the extent the Indian corporate governance requirements vary from those in other jurisdictions where they are listed. An example is cited in the Economic Times report as follows:

“However, StanChart has to think through certain local regulatory needs before pursuing IDRs. For instance, the bank announces its financial results every six months in markets like the UK, as against listed entities in India that must do so every quarter. Also, laws will have to be changed to allow capital gain tax benefits as IDRs have not been included in the definition of ‘securities’. Besides, the bank should have the flexibility to repatriate the money raised through listing.”
Notwithstanding such issues (that require to be addressed), it is hoped that the first IDR deal takes place in the near future as that will clearly pave the way for such future listings by foreign companies on Indian stock exchanges.

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