Standard Chartered Bank is issuing Indian Depository Receipts (IDRs) and hopes to raise about Rs.2,250 from the domestic capital market. This news has made waves in Market as it is first time any foreign company/bank is hitting our Indian Stock market to raise money.
I was also awed on hearing the term and searched on net about IDR’s and it’s implication and am summarizing in the post as follows.
What are Indian Depository Receipts (IDRs)?
Indian Depository Receipts (IDR) are derivative instruments like Global Depository Receipts (GDRs) and American depository receipts (ADRs) that have shares as the underlying assets. Indian companies raise capital overseas through ADRs and GDRs. The IDRs would allow foreign companies to raise capital in India. Like any other depository receipts IDRs are negotiable financial instruments, issued by a local depository against the shares of the foreign company’s publicly-traded securities held by it.
Who can issue IDRs?
Any company listed in the country of incorporation can issue IDRs. Besides, the issuer needs pre-issue capital and free reserves of at least $50 million (around Rs 225 crore) and should have a market capitalisation of $100 million (Rs 450 crore) or more during the last three years. The company should have also made profits in three of the preceding five years.
What is the procedure to apply to an IDR?
The process is similar to an initial public offering where a draft prospectus is filed with the Securities and Exchange Board of India.
The minimum issue size is $500 million (around Rs 2,250 crore). IDRs will be issued through a public offer in India in the demat form and will be listed on Indian exchanges. Trading and settlement will be similar to those of Indian shares.
50% of the issue size is reserved for qualified institutional investors. Retail investors can subscribe upto 30% of the issue size. The minimum application size shall be Rs.20,000.
What in for Indian Investor in Stanchart IDR?
Ten IDRs will be equal to one equity share of Stanchart. It will be selling 22 crore IDRs, meaning, if it aims to raise around Rs.2250 to Rs.3375 crore, each IDR would be priced around Rs.105 to Rs.115. The prospectus of Stanchart gives room for a 5% discount, which will be determined by the benchmark UK pricing next week. So this means, each equity share of Stanchart, when it gets listed, will be priced around Rs.1050. It is expected to get listed on the Indian bourses in June.
Are there tax implication?
IDRs are not subject to securities transaction tax. But, dividends received by IDR holders will be subject to dividend distribution tax.It is not yet clear whether the tax payable would be equal to the Dividend Distribution Tax which for the current fiscal stands at 16.61%.
There is no real clarity on short and long term tax treatment of IDR, the Govt will have to bring about a notification very soon. A quick resolution on the tax angle is imperative.
Should Retailers Apply?
Yes as retailers will be offered a 5% discount and if we get a more clarity on Tax treatment we should apply for this unique and first hand financial instrument and for investor who are looking for a foreign exposure in there portfolio.The IDR issue opens on 25th May and closes on 28th May.