Indian depository receipts

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: The Indian government has recently relaxed the eligibility norms for foreign companies to raise capital from the Indian market through the Indian Depository Receipts (IDRs) route. Why the relaxation? In its anxiety to prevent fly-by-night foreigners from robbing Indian investors, the IDR eligibility norms prescribed in 2004 went overboard. These specified that the issuer company should have pre-issue paid-up capital and free reserves of at least $100 million, an average turnover of $500 million during the three preceding financial years, profits for at least five years preceding the issue, dividends of not less than 10% in each year for the said period and a pre-issue debt-equity ratio of not more than 2:1. Phew!

It was not recognised that companies willing to use the IDR route would not be famous MNCs or even companies in developed countries with deep capital markets. They would instead be from the developing world, and very likely from neighbouring countries. In addition, there could be a handful of foreign companies with presence in India seeking to meet their domestic capital expenditure through an IDR issue. The eligibility norms, though, nixed all these possibilities.

In fact, if a company could have met the IDR norms, it would have been a strong candidate to raise money from its own market and at much lower cost, or from the more prestigious EU/US markets. Even private equity investors would have chased such companies.

Neither was it acknowledged that IDR issues would necessarily be FPOs, as the guidelines allow only listed companies to float IDRs. Significantly, only QIBs are allowed to invest in IDRs. These are sophisticated, well-informed investors. To model the eligibility norms on the domestic IPO norms that seek to protect retail investors, therefore, was guaranteed to keep capital seekers uninterested.

It is good news that the government has now taken a realistic view. Prime Database had submitted a detailed research paper on this subject, and we are glad that our suggestions have been taken. Our study covered the universe of all public issues above Rs 100 crore (32 in all) that were made in 2005-06. The findings were startling. If these 32 companies were foreign-based and had wanted to float an IDR, not even one company would have qualified!