INDIA BUSINESS WORLD - JULY - AUGUST - 2007
The Month that was ...

CENTRE RELAXES DIVIDEND, ISSUES IINDIAN DEPOSITORY RECEIPTS

THE government has eased the rules for foreign companies to raise money from the Indian capital market by issuing Indian Depository Receipts (IDRs). The move is aimed at facilitating greater outflow of capital from the domestic economy, thereby easing the upward pressure on the rupee and preparing the ground for an international financial hub in India.

It is also aimed at energising the IDR market. Though the country had created a policy regime for IDRs-the Indian equivalent of Global Depository Receipts (GDRs) and American Depository Receipts-in 2004, no foreign company has raised any capital in India using this instrument. IDRs are financial instruments that allow foreign companies to mobilise funds by offering equity and getting listed on Indian stock exchanges.

The new amendments to the Companies (Issue of Indian Depository Receipts) Rules, 2004, have extended the limit for an overseas firm to raise money from India in a financial year from 15% of its paid-up capital and free reserves to 25% of the post-issue number of equity shares.

The eligibility rule requiring the issuer to be making profits for at least five preceding years has been changed to three out of five preceding years-the same as that of local issues. Further, the requirement of declaring a minimum dividend for last five years and a minimum 2:1 debt equity ratio has been omitted. Such rules cannot be applied across the board as they are specific to individual companies that follow different dividend policies in their respective jurisdictions, the corporate affairs ministry said.

BUT the new regime is not without riders. Foreign companies taking the IDR route should now have a continuous trading record on the parent country's stock exchange for at least three preceding years. This is to ensure that the issuer is a known entity.

Also, net worth and market capitalisation ceilings have been provided for as eligibility conditions instead of net worth and turnover-based ceilings. The turnover criteria may not disclose the profitability or the market perception of the issuer. The new norms have made capital marker regulator Sebi's approval of IDR applications time-bound.

The disclosure norms have also been rationalised. The requirement of publishing quarterly audited financial results in newspapers has been done away with. Quarterly audited results or unaudited results may be subjected to limited review by the auditors of the issuing company and disclosed after its board approval. The manner of publication has been left to be specified in the listing conditions to be decided by the Indian stock exchange as per Sebi's guidance. Information in respect of listing, trading record or history of the issuer on all the stock exchanges in the world would also be required to be disclosed in the offer document.