Govt, RBI look to ease IDR norms

In order to deepen the capital market and attract more foreign companies to raise funds from the BSE and National Stock Exchange, the government and Reserve Bank of India (RBI) are having a look at easing the norms on Indian Depository Receipts (IDR) for foreign companies, after liberalizing the external commercial borrowing (ECB) regime for companies looking to raise debt abroad.

The base for such recommendations would be a report last year on IDRs from a panel chaired by Competition Commission of India (CCI) member M S Sahoo. The report was on the back burner all this while as the finance ministry wasn’t considering the suggestions. However, it is now being looked at as a starting point for any future announcements on IDR markets.

Sahoo committee comprising of 11 members made many recommendations on overhauling the IDR market which included whole new class of securities called Bharat Depository Receipts (BhDRs) to replace IDRs. The recommendation also included widening of underlying securities to include all instruments accessible to an Indian investor, widening of end-usage rules for capital and non-capital purposes, clear taxation provisions and an easier regulatory framework, among others.

Further the panel suggested that BhDRs be allowed to have all permissible securities as the underlying product. Currently, the underlying securities of a foreign company while issuing IDRs should be the company's equity shares. It also recommends creating two ‘levels’ of BhDRs -- Level-I restricted to large institutional investors, with market knowledge, and Level-II being available for all investors, including retail (small, individual) ones. The report also stated that in order to provide equal opportunities between an Indian security and an IDR in the eyes of all Indian institutional investors to encourage them to invest in the latter, there is a need to modify regulations on the markets and Indian institutional investors.

Meanwhile, other changes suggested include allowing only companies from Financial Action Task Force and International Organization of Securities Commissions jurisdictions, compared to just any foreign company. Allowing the stated end-purpose to be for both capital raising and other purposes, allowing sponsored and unsponsored issues, no necessary approval from Sebi and allowing foreign companies to use the funds in India as well.

IDR is a security a foreign company can list on Indian exchanges. If some changes in the IDR regime could be finalised by February, these could make their way to the 2016-17 Union Budget.