Indian Depository Receipts (IDRs): Meaning, Features & Examples

Explore how Indian Depository Receipts allow foreign companies to raise capital in India and diversify investor participation.

Indian Depository Receipts (IDRs) serve as a financial bridge between Indian investors and foreign companies. They provide a structured way for global companies to access Indian capital markets without issuing shares directly. This article demystifies the concept, features, benefits, and working of IDRs in a simplified manner.

An Indian Depository Receipt (IDR) is a financial instrument issued by a foreign company in India through a domestic depository. It represents ownership of underlying equity shares of the foreign company. IDRs enable Indian investors to gain exposure to international businesses without going through overseas trading platforms.

Indian Depository Receipts allow a foreign company to raise funds in India by offering equity-like instruments to Indian investors. These receipts are denominated in Indian Rupees and listed on Indian stock exchanges. While IDRs do not give direct ownership of foreign shares, they provide economic benefits like dividends and capital appreciation.

Key characteristics of IDRs include:

• Issued by foreign companies: Through domestic Indian depositories
  

• Denominated in INR: Priced and traded in Indian Rupees
  

• Listed on Indian exchanges: Such as NSE or BSE
  

• Underlying asset: Represents shares of the foreign company
  

• Regulated by SEBI: Ensures transparency and investor protection
  

• Transferability: Can be traded in the secondary market like regular shares
  

Here’s how the IDR process unfolds:

1. A foreign company deposits its equity shares with an overseas custodian bank.
   

2. The custodian appoints an Indian depository to issue IDRs in India.
   

3. The IDRs are listed on Indian stock exchanges.
   

4. Indian investors can buy and sell these IDRs just like equity shares.
   

5. Investors receive dividends and corporate benefits in INR, although they don't hold the actual shares.
   

This mechanism allows access to international equity without breaching foreign investment norms.

A notable example is Standard Chartered Bank, which issued IDRs in 2010. It became the first foreign company to list in India via the IDR route.

• Shares held in the UK: Deposited with an overseas custodian
  

• IDRs issued in India: Listed and traded on BSE and NSE
  

• Investor benefits: Dividends and capital gains earned by Indian investors based on the performance of Standard Chartered PLC
  

This provided Indian investors access to the bank’s performance without engaging in foreign exchange or overseas trading.

IDRs offer several benefits:

• Access to global companies for Indian investors without foreign account complications
  

• Diversification in investment portfolios
  

• Enhanced capital raising avenues for foreign firms
  

• Simplified tax treatment as trades occur within Indian jurisdiction
  

• Increased liquidity in Indian markets through foreign participation
  

Despite their advantages, IDRs come with certain drawbacks:

• Limited liquidity: IDRs have not gained widespread popularity in India
  

• Lack of voting rights: Investors do not get direct shareholding rights
  

• Foreign exchange exposure: Underlying performance depends on global markets
  

• Regulatory complexity: Foreign firms must meet SEBI’s eligibility and compliance standards
  

• Corporate action delays: Dividend payments and other benefits may take longer due to cross-border processing
  

The Securities and Exchange Board of India (SEBI) governs the issue and trading of IDRs. Key regulations include:

• The issuing foreign company must have:
  

  • Pre-issue paid-up capital and free reserves of at least USD 50 million
    

  • Average turnover of at least USD 500 million over three years
    

• Must be listed in its home country
  

• Needs a good compliance track record
  

• Requires prior approval from the Ministry of Corporate Affairs
  

• A minimum number of IDRs must be issued to maintain public shareholding norms
  

IDRs support the financial ecosystem in multiple ways:

• Widen investor access to international companies
  

• Encourage cross-border financial integration
  

• Promote global exposure for Indian investors
  

• Boost foreign capital inflow into Indian financial markets
  

• Serve as a gateway for foreign firms to explore Indian business opportunities
  

Indian Depository Receipts are a unique instrument enabling foreign companies to tap into Indian capital markets while offering investors global exposure without leaving the domestic financial system. While their adoption has been limited so far, the potential of IDRs remains significant in a growing and increasingly globalised investment landscape.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.