No takers for Indian Depository Receipts, i-bankers blame it on lack of will

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No takers for Indian Depository Receipts, i-bankers blame it on lack of will

MUMBAI: Six months since the revised guidelines for Indian Depository Receipts (IDR) were notified, the product is still to catch the fancy of overseas companies. In July, some of the criteria were amended to make the instrument more attractive for foreign companies looking to raise money in India. Some merchant bankers feel a mix of inadequate promotion and the relatively stringent rules are the main reasons why the instrument has been cold shouldered so far.

“There could be three reasons why IDRs have not taken off,” says Prime Database CMD Prithvi Haldea, who is also a member of the Sebi primary markets advisory committee (PMAC). “One, even the diluted eligibility criteria are still very high. Two, the instrument has not been marketed aggressively overseas by our exchanges. Third, we may not be competitive enough.”

Investment bankers, who spoke to ET on condition of anonymity, said India has done little to market IDRs. Also, there has not been any concerted efforts to involve global merchant bankers to promote this route as an attractive capital raising option.

“Look at NYSE and LSE. They have offices/people in India who are telling people 24/7, to list there. Has any Indian exchange marketed the concept abroad to woo companies. How are overseas companies expected to know that there is an IDR market waiting to be discovered in India. To date, not even one application has come,” said a merchant banker.

Just like American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), which are instruments used by Indian companies to raise money abroad, IDRs are meant for foreign companies looking to raise capital in India.
It was expected that companies from neighbouring countries — especially in the SAARC region — could find IDRs an attractive option to raise funds, as it would be easier and cheaper compared to the US or European markets.
Yet merchant bankers are sceptical over whether the IDR route would in reality provide a cost advantage to foreign companies. “Is there an advantage in terms of timing, branding and marketing opportunity, access to quality and sectoral investors etc. India is a better destination for investing money rather than raising it,” said an official at a US-based investment bank.

The government had earlier notified that only strong global companies should be permitted to raise funds through IDRs; these must have a paid-up capital of $100 million, average turnover of $500 million during the preceding three years, profits for the past five years and a minimum dividend of 10%. Not surprisingly, no foreign company came forward to issue IDRs. In fact, if a company could have met the IDR norms, it would have easily raised 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 .

To kick-start the concept, Prime Database CMD Mr Haldea, proposes a check on the feasibility of the guidelines.
“Make a list of the top companies in the neighbouring 7-8 countries and see how many of them are able to meet the eligibility criteria. If found that the norms are still very tough, there would be a need again to revisit the same. On another front, we can also push the concept to foreign companies who have a large manufacturing/services presence in India and would like to raise local resources for their expansion needs,” he says.

Concerns have also been raised about the provision allocating 50% of an IDR issue to retail investor. “It is already difficult to monitor Indian companies. It would be much more difficult for us to monitor companies in say Bangladesh, Sri Lanka or Dubai etc. Therefore it would not be correct to expose retail investors to such companies initially. We should try out QIB participation to begin with, get comfortable with the entire process and how much control can we exercise on foreign companies. Issues about inter-country reciprocal agreements for disclosure, sharing of information etc ,” says Mr Haldea.