Wooing foreign firms: Sebi issues IDR conversion guidelines

Mumbai: Market regulator Sebi today came out with a detailed framework for conversion of Indian Depository Receipts into equity shares, as part of efforts to attract more foreign companies to get listed on domestic bourses.

IDRs are generally instruments denominated in rupees and allow overseas companies to raise funds from the Indian market.

Securities and Exchange Board of India (Sebi) has said that IDRs cannot be redeemed into underlying equity shares for a period of one year from the date of its listing.[caption id=“attachment_645583” align=“alignleft” width=“380”] The Sebi office logo. Image courtesy Sebi[/caption]

Also, the issuer would provide two-way fungibility for IDRs. Thereby, Indian shareholders can convert their depository receipts into equity shares of the issuer company and vice-versa.

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The fungibility option would be available on a continuous basis and at the time of conversion 20 percent would be reserved for retail investors.

Fungibility was seen as a major issue with foreign companies in getting listed on domestic bourses. So far, only UK banking major StanChart has come out with their IDRs.

“The issuer shall provide said fungibility to IDR holders in the following ways – converting IDRs into underlying shares and converting IDRs into underlying shares and selling the underlying shares in the foreign market where the shares of the issuer are listed and providing the sale proceeds to the IDR holders,” Sebi said in today’s circular.

In the 2012-13 Budget, the government had proposed to allow two-way fungibility of IDRs to encourage greater foreign participation in the Indian capital market.

Sebi said the IDR fungibility would be available at least once every quarter and the window would be open for atleast seven days.

Existing IDR issuers can follow the new framework and have to provide the option of redemption/conversion within three months from the date of completing a year of listing.

The regulator said that fungibility if once exercised and disclosed to public cannot be changed without its approval.

In case of option of converting IDRs into underlying shares and providing the sale proceeds to the IDR holders, the issuer would disclose the range of fixed or variable costs in percentage terms.

However, all the cost together should not exceed five per cent of the sale proceeds.

The total number of IDRs available for fungibility would be fixed before the opening of the window.

“Re-issuances of IDRs during the fungibility window, if any, shall be considered for computation of Headroom only at the time of next cycle of fungibility,” Sebi said.

Fungibility window for this purpose refers to the time period during which IDR holders can apply for conversion of IDRs into underlying equity shares.

In case of requests for conversion in excess of the limit available, the manner of accepting IDRs for conversion/redemption or shares for re-issuance would be on proportionate basis.

Additionally, 20 percent would be reserved for retail investors while excess unsatisfied demand from the retail the retail category would be included in the unreserved portion.

All the IDRs applied for conversion into equity shares would be transferred to redemption account at the time of application and in case of unsuccessful bids the balance would be transferred back to the applicant’s account.

According to Sebi, existing issuers would provide the option of redemption/conversion within three months from anniversary of the date of listing of their IDRs.

Before exercising the conversion or redemption option, Sebi said the IDR issuer should give newspaper advertisements and also inform the bourses about the same, at least one month before exercising the option.

PTI