Procedure for Rights Issue of Indian Depository Receipts (IDRs)

Khushboo Sharma

Khushboo Sharma

Published on: Feb 6, 2024

Pragya Sonkhiya

Updated on: Feb 6, 2024

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Introduction:

As per Section 2(48) of Companies Act 2013 Indian Depository Receipt (IDR) means any instrument in the form of a depository receipt created by a Domestic Depository in India and authorized by a company incorporated outside India which is making an issue of such depository receipts. Issuing Indian Depository Receipt (IDR) is one of modes available to companies incorporated outside India for raising funds from India.

Intermediaries involved in the issue of Indian Depository Receipts (IDRs)

Companies incorporated outside India may issue Indian Depository Receipts (IDRs) through a Domestic Depository, to a person resident in India and a person resident outside India by complying with the provisions of the Companies (Registration of Foreign Companies) Rules, 2014 and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Also, any issue of Indian Depository Receipts (IDRs) by financial/ banking companies having presence in India, either through a branch or subsidiary, shall require prior approval of the sectoral regulator(s).

Applicable Provisions:

1. Rule 13 of Companies (Registration of Foreign Companies) Rules, 2014
2. Regulation 78 of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015
3. Regulation 183, 184, 208, 213, 214, 217, 218, 219, 221, 222, 223, 224, 225, 226 and Schedule III, VIII, IX, XII, and XIX of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
4. Para 1.4 of Annexure 9 of Master Direction- Foreign Investment in India

Mandatory Requirements [Rule 13(2) and Regulation 183, 213 & 214]:

1. Issuing company shall abstain from issuing IDRs unless (Companies (Registration of Foreign Companies) Rules, 2014):
   • its pre-issue paid-up capital and free reserves are at least US$ 50 million and it has a minimum average market capitalization (during the last 3 years) in its parent country of at least US$ 100 million
   • it has a track record of distributable profits for 3 years at least out of immediately preceding 5 years
   • it has been continuously trading on a Stock Exchange in its parent or home country (the country of incorporation of such company) for at least immediately 3 preceding years.
   • none of its promoters or director is a fugitive economic offender.
2. Issuing company shall be eligible to make an issue of IDRs only if (SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018):
   • at the time of undertaking the rights issue, there is no breach of the ongoing material obligations under the listing agreement and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as was applicable, at the time of initial offering of Indian Depository Receipts (IDRs)
   • none of its promoters or directors are fugitive economic offender.
3. Obtain in-principle approval for listing of IDRs to one or more Stock Exchange(s) and chose one of them as the designated Stock Exchange.
4. Enter into an agreement with a Depository for dematerialization of proposed issue of IDRs.
5. Make firm arrangements of finance* from verifiable means for funding of the issue.
6. IDRs shall be denominated in Indian Rupees only.
*Note:75% of the stated means of finance for the project proposed to be funded from issue proceeds, excluding the amount to be raised through the proposed issue of IDRs or through existing identifiable internal accruals.

Procedure:

1. Approval from Appropriate Authorities in the Country of Incorporation [Rule 13(3)(a)]:
   Issuing company shall obtain the necessary approvals or exemptions from the appropriate authorities in the country of its incorporation under the relevant laws in respect of rights issue of IDRs.
2. Announcement of Record Date [Regulation 217 and Regulation 78]:
   Issuing company shall fix a record date for the purposes of payment of dividends or distribution of any other corporate benefits to the IDR Holders, if required in its home country or other jurisdictions where its securities may be listed, by giving advance notice of at least 04 working days to the recognized Stock Exchange(s) of such record date and its purpose.
   Note:
   • In case, issuing company withdraws the rights issue after announcing the record date, it shall:
     • notify the Board about the same
     • publish the same in one English national daily newspaper, one Hindi national daily newspaper and one regional language daily newspaper with wide circulation at the place where its principal office is situated in India
     • abstain from making an application for offering of on a rights basis for a period of 12 months from the said record date.
   • Issuing company shall decide price and the ratio of issue simultaneously with record date in accordance with the home country regulations.[Regulation 221]
3. Appointment of Lead Managers, Other Intermediaries and Compliance Officers [Rule 13(3)(h), 13(3)(i) and Regulation 184 & 219]:
   Issuing company shall:
   • make the following appointments for the purposes of rights issue of IDRs:
     • One or more Merchant Bankers which are registered with the Board as lead manager(s) to the issue
     • Compliance Officer who shall be responsible for monitoring the compliance of the securities laws and redressal of investors’ grievances
   • enter into an agreement with an Overseas Custodian Bank and a domestic depository for the purposes of rights issue of IDRs
   • make arrangements for collection at centers as specified in Schedule XII (Mandatory Collection Centres) of the ICDR Regulations.
4. Obtain In-Principle Listing Permission from Recognized Stock Exchange(s) [Regulation 214 and Schedule XIX]:
   Issuing company shall:
   • make an application to all the Stock Exchange(s) in India, where its IDRs are already listed, seeking in-principle approval for listing of the rights issue of its IDRs on such Stock Exchange(s) and chose one of them as the designated Stock Exchange
   • execute a listing agreement with such Stock Exchange in terms of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
   Note:In case the issuing company fails to obtain listing or trading permission from the Stock Exchange(s), where the specified securities were listed, it shall refund through verifiable means the entire monies received within 04 days of receipt of intimation from Stock Exchange(s) rejecting the application for listing of IDRs.[Regulation 208(2)]
5. File Draft Offer Document and Offer Document [Regulation 218 & 220]:
   Issuing company shall:
   • file draft offer document in line with the home country requirements along with an addendum comprising of the disclosures as specified in Part C of Schedule VIII (Disclosures in Offer Document and Abridged Prospectus and Letter of Offer for Issue of IDRs) and the fees as specified in Schedule III (Fees to be paid along with Draft Offer Document/ Draft Letter of Offer or Offer Document) through the lead manager(s), with the Board
   • file revised draft offer document and updated addendum highlighting all the changes made in the draft offer document, specified by the Board
   • submit an undertaking from the overseas custodian and domestic Depository addressed to the issuer, for compliance with the obligations in respect to the said rights issue under their respective agreements entered into between them, along with the offer document.
6. Dispatch of Issue Material [Regulation 222]:
   Issuing company shall:
   • send abridged letter of offer, containing disclosures as specified in Part B of Schedule IX, along with application form, through registered post or speed post or courier service or electronic mode to all the eligible IDRs holders, at least 03 days prior to the date of opening of the issue and
   • make it available on the website
   • also, make the hard copy of the offer document for rights offering along with the addendum available at the principal office or lead manager to any existing IDR holder who has made a request in this regard.
   Note:Eligible IDR holders who have not received the application form can make a written application on a plain paper to the domestic depository, along with the requisite application money within the time frame for acceptance. In case, any eligible IDR holder makes an application on an application form as well as on plain paper, such application is liable to be rejected.
7. Make Issue-related Advertisement [Regulation 223]: Issuing company shall, at least 03 days prior to the opening date of right issue, make a public announcement in respect of such rights issue, in the following:
   • one English national daily newspaper with wide circulation
   • one Hindi national daily newspaper with wide circulation and
   • one regional language daily newspaper with wide circulation.
   Note:Such advertisement made pertaining to the rights issue shall comprise of the details as per Annexure-A.
8. Subscription and Allotment of Securities [Regulation 224 and 226]:
   Issuing company shall:
   • keep the rights issue open for subscription in India for a period as applicable under the laws of its home country but in no case less than 10 days
   • send the allotment letter of rights to the IDR holders at the time these are sent to shareholders of the issuing company as per the requirement of its home country or other jurisdictions where its securities are listed.
   Note:
   • Issuing company shall opt for rights issue of IDRs via Fast Track Issue subject to the satisfaction of the following conditions:
     • compliance in all material respects with the provisions of the deposit agreement and of the listing agreements (or listing conditions) applicable in all the jurisdictions wherever it is listed, for a period of at least three years immediately preceding the date of filing of the offer document, and furnish a certification to this effect
     • filing the offer document for the rights offering and has been subsequently reviewed by the securities regulator of the home country of such issue
     • no pending show-cause notices or prosecution proceedings against the issuer or its promoters, where applicable, or whole-time directors as on the reference date by the Board or the regulatory authorities in its home country restricting them from accessing the capital markets and
     • redressal at least ninety-five per cent of the complaints received from the Indian Depository Receipts (IDRs) holders before the end of three months period immediately preceding the month of filing date of the letter of offer with the designated Stock Exchange.
   • Issuing company shall utilize the funds raised with IDRs pursuant to the rights offering only upon completion of the allotment process. [Regulation 225]