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: India is gradually moving towards capital account convertibility and Indian investors are looking out for investment opportunities outside India. In the past couple of years, there have been several deals wherein Indian companies have made overseas acquisitions. Considering the exchange control regulations there are very few opportunities for the Indian investors to participate in global capital markets. Investments in indian depository receipts (IDRs) appear to be an interesting opportunity for the Indian investors to satisfy their appetite for the foreign equity. This article gives a basic introduction to IDRs.
IDRs are Indian counter parts of ADRs or GDRs through which several Indian companies have raised funds from the overseas investors. Through IDRs it may be possible for the foreign companies to raise funds from Indian investors and it would be possible for the Indian investors to invest in equity shares of foreign companies. The IDRs would have the equity shares of the overseas issuer company as underlying assets. The shares issued by the overseas company would be held by an overseas custodian bank and on the basis of these underlying shares the Indian depository bank would issue IDRs to the Indian investors.
The Indian IDR holders would thus indirectly own the equity shares of the overseas issuer company. However, the Indian investors may have to pass certain regulatory hurdles before they can directly own such equity shares. The relevant regulations contemplate possibility of conversion of IDRs into the underlying shares after one year. Such conversion of IDRs into equity shares of the overseas companies would be subject to the exchange control regulations. For this, one may have to wait for some more time till India further progresses towards full capital account convertibility.
IDRs would be listed on Indian stock exchange and denominated in Indian currency. Since the underlying asset for the IDRs would be foreign shares, the market value of such shares outside India as well as the currency value would be reflected in the valuation of the IDRs in Indian rupee terms. Dividends declared by the foreign issuer company would be passed on to the Indian IDR holders through the Indian depository. The Indian investor can either sell the IDR to another Indian resident, or redeem the IDRs and sell the underlying equity shares outside India or may directly hold the underlying equity shares. However, some changes may be required in the exchange control regulations for this purpose. ...
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