Indian Depository Receipts (IDR): Definition & Meaning

Indian Depository Receipts (IDRs) are financial instruments issued in India, representing shares of foreign companies. IDRs provide Indian investors with indirect ownership of global companies' stock. They allow companies to raise capital in India without directly listing on Indian stock exchanges. IDRs facilitate diversification for Indian investors while providing foreign companies access to the Indian capital market.
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In today's globalized financial landscape, investors constantly seek opportunities for diversification and explore new markets. Indian Depository Receipts (IDRs) have emerged as an enticing investment avenue for those looking to tap into the Indian economy without directly investing in Indian securities.

Indian Depository Receipts, often abbreviated as IDRs, are financial instruments introduced by the Indian government to facilitate foreign investment into Indian securities. They function as a medium through which foreign companies can raise capital from Indian investors without listing their shares on Indian stock exchanges. IDRs are structured to represent underlying shares of a foreign company, making them an attractive option for Indian investors interested in international diversification.

To issue IDRs, one must fulfill the following criteria:

  • The company must possess pre-issue paid-up capital and free reserves totaling a minimum of US$ 50 million.
  • It must demonstrate a minimum average market capitalization of at least US$ 100 million in its home country over the past three years.
  • The company should have a continuous trading record on a stock exchange in its home country for at least three consecutive years preceding the application.
  • It should also exhibit a track record of distributable profits for at least 3 out of the preceding 5 years.
  • The company needs to be listed in its home country and should not have faced any prohibitions from issuing securities by any regulatory body.
  • Additionally, it should maintain a commendable track record of compliance with securities market regulations.
  • The size of an IDR issue should not fall below Rs 50 crores.

Some of the essential features of IDR are as follows:

  1. Structure: IDRs are essentially certificates issued by a depository bank in India, which represent shares of a foreign company. These certificates are traded on Indian stock exchanges, allowing investors to own a stake in the foreign company indirectly.

  2. Underlying Assets: The underlying assets of IDRs are shares of the foreign company that has issued them. These shares are held by a custodian bank outside India, ensuring transparency and security.

  3. Listing: IDRs are listed and traded on Indian stock exchanges, just like regular equity shares. This gives investors liquidity and the ability to buy or sell IDRs as with any other security.

  4. Currency: IDRs are denominated in Indian Rupees (INR), meaning Indian investors can invest in foreign companies without worrying about currency exchange risks.

  5. Dividends and Capital Gains: Investors in IDRs are entitled to receive dividends and capital gains, just like foreign company shareholders.

Here are some of the major benefits of IDR:

  1. Diversification: IDRs offer Indian investors an opportunity to diversify their portfolios internationally, reducing their exposure to domestic economic conditions and risks.

  2. Ease of Investment: Investing in IDRs is relatively straightforward, as it involves trading on familiar Indian stock exchanges and in Indian rupees.

  3. Currency Risk Mitigation: Since IDRs are denominated in INR, investors are protected from currency exchange rate fluctuations.

  4. Access to Global Companies: Indian investors gain access to global companies that they might not have been able to invest in otherwise.

  5. Income Generation: IDRs provide income to investors through dividends and potential capital appreciation, enhancing their overall return on investment.

Summing it Up

Indian Depository Receipts hold significant importance in the global financial arena. They encourage foreign companies to tap into the vast Indian market without the complexities of directly listing on Indian stock exchanges. This, in turn, fosters international investment and strengthens India's position as a key player in the global economy. Additionally, IDRs offer Indian investors an avenue to diversify their investment portfolios across geographies, promoting a more balanced and risk-averse approach to investing.

IDRs are a valuable tool for both foreign companies seeking capital from Indian investors and Indian investors looking to expand their investment horizons. These financial instruments bridge the Indian and global financial markets, facilitating cross-border investment while minimizing currency risks. As the world embraces globalization, IDRs are expected to be increasingly crucial in the Indian and global financial landscape.

FAQs on Indian Depository Receipts

The minimum issue size is Rs 50 crores.

Indian stock exchanges list IDRs, and they function like other equity shares. They enable Indian investors to invest their money in stocks of international companies. However, these companies must maintain a subsidiary operating in India.

Indian investors can invest in foreign companies through IDRs, granting them access to a broader spectrum of investment opportunities and empowering them to diversify their portfolios.

SEBI regulates depository receipts.

Negotiable certificates, known as Depository Receipts (DRS), certify ownership of a company's publicly traded equity or debt. The issuing firm deposits the underlying equity or debt instruments at a local bank in its country of residence.

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