year, SEBI issued
a circular that imposed some curbs on redemption by holders of Indian
depository receipts (IDRs). Under that circular, redemption was permitted only
if the IDRs are infrequently traded on the stock exchanges in India. This was a
method of limiting exit options to investor exclusively to the Indian markets,
except where they are illiquid (in which case conversion into underlying shares
and sale on foreign markets will be permissible). This was considered to be highly
restrictive to IDRs as an investment opportunity. In any event, the instrument
does not appear to have met with any success given that there is only one
company that has thus far listed its IDRs on the Indian exchanges.
now issued another circular
dated August 28, 2012 that permits partial fungibility of IDRs. The objective
is “to improve the attractiveness of IDRs as an instrument thereby ensuring
long term sustainability of IDRs …” Under the revised regime, redemption/ conversion
of IDRs into underlying equity shares is permissible up to the extent of 25% in
each financial year.
While this provides some headroom for
fungibility, it is unlikely to result in any significant expansion of the
market for IDRs. In that sense, it is only a limited step.
Update: The Reserve Bank of India has also issued a circular giving effect to limited two-way fungibility of IDRs.