The Securities and Exchange Board of India (SEBI) has allowed partial fungibility of Indian Depository Receipts (IDRs) — redemption or conversion of IDRs into underlying equity shares — in a financial year to the extent of 25 per cent of the IDRs originally issued.
This has been decided “to retain the domestic liquidity,” said SEBI in a circular to stock exchanges, depositories and other market participants.
With a view to encouraging greater foreign participation in the capital market, the then Finance Minister, Pranab Mukherjee, in his budget speech on March 16, 2012, had proposed two-way fungibility of IDRs , subject to a ceiling. The capital market regulator, too, decided to prescribe a framework for two-way fungibility of IDRs. This would “improve the attractiveness of IDRs as an instrument, thereby ensuring long term sustainability of IDRs,” SEBI noted.
However, SEBI decided now only to allow partial fungibility in an effort to retain domestic liquidity.
Earlier, on June 3, 2011, SEBI had prescribed the framework for redemption of IDRs into underlying equity shares by permitting, after the completion of one year from the date of issuance of IDRs, only if the IDRs were infrequently traded on the stock exchanges in India. “This would stand rescinded,” SEBI added. SEBI also said that suitable instructions for modifying the existing legal framework governing IDRs, in order to implement the decision to allow redemption of IDRs into underlying equity shares and re-conversion of equity shares of a foreign issuer (which has already listed their IDRs) into IDRs, will be issued separately.
The fungibility issue is seen as one of the major factors restraining foreign entities from listing their IDRs. So far, only U.K. banking major Standard Chartered in 2010 has come out with its IDRs.
The Reserve Bank of India said there would be an overall cap of $5 billion for raising capital by issuance of IDRs by foreign companies.