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Many of you often come across the term Indian Depository Receipts or IDRs. You have been wanting to get an in-depth knowledge of the same. IDRs refer to the financial instruments allowing investors to make an investment in foreign companies through the Indian stock market. The Indian Depository Receipts are generally designed for giving the Indian investors access to various investment opportunities. It helps to facilitate a comprehensive foreign capital flow into India.
This blog post will take you through the various aspects of what is indian depository receipt, its features, advantages, eligibility etc. You will find this comprehensive guide helpful for making an informed investment decision.
Investors and companies must know the specific eligibility criteria and essential considerations prior to venturing into Indian Depository Receipts or IDRs.
For starters, when issuing IDRs, the company has to list itself on any stock exchange of India. They ought to comply with the applicable regulations and laws. In addition, the company should have a good profitability track record and not have any defaults in terms of regulatory requirements.
The second crucial parameter includes the requirement of a minimum subscription. It refers to subscribing to a minimum number of shares by a single investor. This consideration is different for each organisation. The factors that determine this include the market capitalisation of the market, underlying share price, etc.
Essentially, the investors must review such eligibility criteria and key factors carefully prior to investing in the IDRS.
Key Features of IDR
The following are the most attractive features of the Indian Depository Receipts:
- Structure: IDRs are generally the certificates that an Indian depository bank issues representing the foreign company shares. Indian stock exchanges trade these certificates, indirectly enabling the investors to own a stake in a foreign company.
- Underlying Assets: IDR’s underlying assets are the shares of a foreign company which they have issued. The custodian bank outside India holds these shares while ensuring completing security and transparency.
- Listing: Like ordinary equity shares, IDRs are listed and traded on Indian stock markets. As a result, investors have liquidity and may purchase or sell IDRs just as they would any other investment.
- Currency: Indian investors can invest in overseas enterprises without worrying about currency exchange risks since IDRs are priced in Indian Rupees (INR).
- Dividends and Capital Gains: Just as shareholders of international companies are entitled to dividends and capital gains, so do the investors in IDRs.
Laws That Govern Indian Depository Receipt
- In accordance with section 605 A of the Companies Act, the Central Government informed the public about the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules).
- SEBI released guidelines for IDR disclosure and a model listing agreement that outlines the requirements for continuing listing between the exchange and the foreign issuer.
Which Intermediaries are Involved in the Issuance of IDRs?
Custodian Bank is a financial institution that was founded outside of India, has an office there, and serves as custodian for the issuer’s equity shares, which are the basis for the planned issuance of IDRs in the underlying equity shares of the issuer.
A domestic depository is a custodian of securities that is approved by the issuing business to issue Indian Depository Receipts and is registered with the SEBI.
The draft list for the issuing of the IDR is to be filed with SEBI by the issuer firm through a merchant banker who is registered with the regulator and is in charge of conducting due diligence.
Benefits of Indian Depository Receipts
Indian Depository Receipts offers various benefits such as:
- Diversification: Indian investors can lessen their exposure to dangers and domestic economic situations by diversifying their investments globally with IDRs.
- Ease of Investment: Since trading in Indian rupees and on well-known Indian stock exchanges is required, investing in IDRs is very simple.
- Currency Risk Mitigation: Investors are protected from changes in currency exchange rates since IDRs are valued in Indian Rupees.
- Access to Global Companies: Indian investors now have access to international businesses that they would not have otherwise been able to fund.
- Income Generation: IDRs increase investors’ total return on investment by giving them income in the form of dividends and possible capital gains.
How is an IDR Issued?
The Securities and Exchange Board of India (SEBI) has laws that provide that IDRs are offered to Indian investors in the same manner as domestic equity shares. Investors submit bids for the initial public offering (IPO), which the issuing firm floatsis floated by the issuing firm. The issuer sets the bidding price range, and following the issue’s completion, the final price is disclosed.
The chosen investors get the depository receipts in their Demat account following the conclusion of the bidding procedure. Then, exactly as with regular equity shares, they may trade these receipts on the stock market.
IDR Taxation and Equity Shares
Recognise the tax ramifications and how they affect equity shares before investing in Indian Depository Receipts (IDRs).
First of all, take notice that IDRs are subject to foreign direct investment (FDI) rules and standards since they are regarded as foreign investments in India. This indicates that, with relevant withholding taxes on profits and capital gains, the tax status of IDRs is comparable to that of FDI.
Additionally, investors need to understand the idea of “tax-sparing” IDRs. This speaks to the potential for investors to receive a tax credit for taxes that the corporation issuing the IDRs may not have really paid.
This is something to consider when assessing the possible profits from IDRs and may lead to a reduced tax burden for investors. Consult a tax counsellor to properly comprehend the advantages and ramifications of tax exemptions pertaining to indian depository receipts example.
Investors should also be aware of the dangers of IDRs, including unstable political environments and currency changes in the underlying company’s nation. Before making an investment, thoroughly investigate and comprehend the firm issuing the IDR.
With Indian Depository Receipts, investors have a special chance to diversify their holdings and make investments in overseas businesses without having to deal with the difficulties of switching between different stock markets and currencies.
Indian Depository Receipts are undoubtedly a useful instrument for those seeking to increase their investing possibilities in light of the markets’ growing globalisation.
The Domestic Depository will disburse dividends or other corporate actions related to IDRs to IDR holders proportionate to their IDR holdings upon receipt of those actions.
IDRs are listed on Indian stock markets and are traded much like regular equity shares. They make it possible for Indian investors to put their money into foreign company equities. Nonetheless, these businesses need to continue to have an Indian subsidiary.
Depository Receipts (DRS), often negotiable certificates, attest to owning a company’s publicly traded debt or equity. The issuing company deposits the underlying debt or equity instruments in its home nation with a nearby bank.
A depository bank that buys and deposits shares of foreign firms on an account issues a certificate known as an international depository receipt (IDR) or global depository receipt (GDR).
Only after a year has passed after the IDRs were issued, and only then may they be converted into the underlying equity shares, provided that the relevant rules of the Foreign Exchange Management Act and the RBI’s regulations issued under it are followed.