Restrictions on Redemption of IDRs

On the basis of prevalent regulations, Standard Chartered Bank issued Indian Depository Receipts (IDRs) last year with the offer document stating that IDRs would be convertible into equity shares by way of redemption one year after the issue subject to the approval of the Reserve Bank of India (RBI) on a case-by-case basis. However, one year after the IDR offering, SEBI has issued a new circular on June 3, 2011providing that “redemption of the IDRs shall be permitted only if the IDRs are infrequently traded on the stock exchange(s) in India.” This imposes a significant restriction on redemption of IDRs that was previously not anticipated, and hence appears as a change to the legal regime that further restricts the viability of IDR issuances in the Indian markets.
A report in the Business Standard highlights the consequences of SEBI’s decision:
The annualised trading volume in Standard Chartered’s IDRs over the last six months was 48.5 per cent of the total IDR issue. So, there will be no redemption. Sebi’s move has hurt investors, as they lost an arbitrage opportunity of converting the IDR into underlying shares and selling it in global markets.
This announcement is not in the interest of future IDR issuances. Some even say foreign companies would find it difficult to attract investors because of the limited exit route.

The rationale for the decision to restrict redemption to illiquid IDRs is yet unclear.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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