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SEBI Allows MFs to Invest in IDRs

The market regulator has issued new guidelines enabling participation by funds

To further promote the development of the securities market, the Securities and Exchange Board of India (SEBI)  has said that mutual funds can now invest in Indian Depository Receipts (IDRs).

IDRs are similar to the more well-known American Depository Receipts (ADRs) or the Global Depository Receipts (GDRs), which allow foreign companies to raise money via the Indian capital markets and for Indian investors to buy into shares of foreign companies.

The issue of IDRs was first made possible by the Department of Company Affairs in February 2004. That meant foreign corporate entities can raise funds by offering their shares through issue of depository receipts in India. This move by SEBI was, more or less, an enabling exercise that would also give mutual funds a chance to buy into foreign companies.

As per the authorities IDRs are “instruments created by a domestic depository in India against the underlying equity shares of an issuing company”.

The first step in the process involves a foreign company issuing shares to an Indian depository, like a foreign bank with a place of business in India, which will issue receipts denominated in Indian rupees to investors here. These will then have to be listed on Indian stock exchanges where they will be freely tradeable.

Anyone interested in issuing IDRs will need to ensure that their paid-up capital and free reserves are over $50 million and minimum average market capitalisation during the last three years is $100 million, besides having an average turnover of $500 million in the three fiscals preceding the issue. In addition, the issuing company should have been making profits for the last five years before the issue.

The immediate costs would involve the payment of a $10,000 non-refundable amount. Issue fee of half a per cent will also be charged on the value of the projected issue.