What is an Indian Depository Receipt?
Have you ever thought of investing in the stocks of foreign companies? As per the Reserve Bank of India (RBI), you can invest up to 250 million US Dollars in foreign equity instruments in a year. But, are you aware of the methods through which you can do so?
A traditional way to do it is by opening a Demat account and a bank account in the country where you want to invest. Alternatively, you can also invest in a domestic mutual fund that invests its corpus in foreign stocks. However, this involves a complex process that can be a bit difficult to understand. Also, your returns might get affected due to currency exchange risks.
The easier and more profitable route to invest in overseas markets is through an Indian Depository Receipt (IDR). You can invest in an IDR to gain long-term returns. It works very much like an equity share, albeit a bit differently. Let’s decode the Indian Depository Receipt meaning and how it works.
What is an Indian Depository Receipt?
An Indian Depository Receipt (IDR) is a financial instrument demonstrated in Indian rupees in the form of a depository receipt. It is issued by a domestic depository (SEBI-registered custodian of securities in India) against the underlying equity shares of a foreign company looking to raise funds from the Indian stock market.
Since foreign companies are not allowed to list their shares directly on Indian stock markets, they need to deposit their shares to an Indian depository, which in turn, issue an IDR. These IDRs get listed on the Indian stock exchanges and work like other equity shares. They allow Indian investors to invest their money in stocks of international companies.
However, those companies need to have a subsidiary working in India. A perfect Indian Depository Receipt example is Hindustan Unilever Limited. It is a subsidiary of Unilever Plc, an international company dealing in consumer goods, and is listed on the Bombay Stock Exchange (BSE) as well as the National Stock Exchange (NSE).
Which Foreign Companies are Eligible to Issue Indian Depository Receipts?
Below are the conditions a foreign company needs to fulfil to become eligible for issuing an Indian Depository Receipt:
- It should have a subsidiary with a significant business presence in India
- It should have a pre-issue paid-up capital and free reserves of at least 50 million US Dollars
- It should have a minim average market capitalisation (during the last three years) of at least 100 million US Dollars in its parent country
- It should have a continuous trading history of at least three years on a stock exchange in its parent country
- It should have a track record of distributable profits for at least three years out of the immediately preceding five years
- It should not have been prohibited to issue securities by a regulatory body in its parent country
- The size of the IDR should not be less than ₹50 crores
How is an IDR Issued?
As per the regulations of the Securities and Exchange Board of India (SEBI), the IDRs are issued for Indian investors in the same way as domestic equity shares. The process involves the issuing company floating an Initial Public Offering (IPO), and the investors placing bids for it. The price band for the bidding is decided by the issuer and the final price is announced after the closure of the issue.
After the completion of the bidding process, the depository receipts are allotted to the selected investors in their Demat account. They can then trade these receipts at the stock market just like other equity shares.
The Indian Depository Receipts provide a great opportunity to invest in international stocks and earn profits. However, one should also remember that they involve a fair bit of risks as well. Any fluctuations in the foreign market can directly impact the IDR’s market value even if the Indian market is going the opposite way.
Hence, before you decide to invest in an IDR, you should be well-read and well-informed of its risks and advantages.
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Frequently Asked Questions
Gains from IDRs are added to the annual income of the investor and taxed as per the applicable income tax slab rate if the IDR is sold within a year of its purchase. Else, they are taxed at 20% with indexation and 10% without indexation.
Yes. The minimum bidding amount for an IDR is ₹20,000. However, the price band for the bidding is decided by the issuing company at the time of the IDR issuance. The final price is announced after the closure of the issue.
The IDRs work in the same way as other Indian equity shares. Any retail investor with a Demat account and a bank account linked to their Demat account can bid for an IDR issue. If successful, the receipts would be allotted directly in their Demat account.