SEBI allows two-way fungibility of IDRs under revised guidelines

The Securities and Exchange Board of India (SEBI) has issued detailed guidelines for conversion of Indian Depository Receipts (IDRs) into equity shares, so as to attract more and more foreign companies to get listed on Indian bourses.

IDRs, which are generally denominated in rupees, allow overseas companies to raise funds in the Indian market. These are convertible into equity shares at a later stage.

SEBI has now said all the IDRs would have partial two-way fungibility, ie, Indian shareholders would be able to convert their depository receipts into underlying equity shares of the issuer company and vice versa, within the available headroom.

However, SEBI said IDRs cannot be redeemed into underlying equity shares for a period of one year from the date of listing.

The fungibility option would be available on a continuous basis and at the time of conversion 20 per cent would be reserved for retail investors.

''The issuer shall provide the said fungibility to IDR holders in the following ways - converting IDRs into underlying shares and converting IDRs into underlying shares and selling the underlying shares in the foreign market where the shares of the issuer are listed and providing the sale proceeds to the IDR holders,'' SEBI said in a circular.

Guidelines for fungibility of future IDR issuance

• IDRs cannot be redeemed into underlying equity shares before the expiry of one year from the date of listing;
• The issuer should provide two-way fungibility of the IDRs after completion of one year of listing;
• IDR fungibility should be provided on a continuous basis;
• The issuer shall provide fungibility to IDR holders in any of the following ways: converting IDRs into underlying shares / converting IDRs into underlying shares and selling the underlying shares in the foreign market where the shares of the issuer are listed and providing the sale proceeds to the IDR holders / both the above options;
• The option once exercised and disclosed by the issuer cannot be changed without the SEBI's approval;
• All the IDRs that have been applied for fungibility by the holder should be transferred to IDR redemption account at the time of application.
• The issuer may receive requests from the holders of underlying shares and convert these into IDRs subject to the Headroom available and subject to SEBI and RBI guidelines;
• The issuer should disclose the range of fixed/variable costs of conversion in percentage terms upfront and ensure that all the costs together shall not exceed 5 per cent of the sale proceeds;
• The issuer should disclose available headroom and significant conversion/ reconversion transactions on a continuous basis; and
• The issuer should lay down detailed procedures while taking into consideration the broad guidelines and norms specified by SEBI and RBI.

For existing listed IDRS, SEBI said after completion of one year from the date of issue of IDRs, the issuer should provide redemption/conversion of IDRs into underlying equity shares of the issuer of up to 25 per cent of the IDRs originally issued on an annual basis.

This should be done after inviting expression of interest from IDR holders through suitable advertisements well in time.

The periodicity for IDR fungibility shall be at least once every quarter. The fungibility window shall remain open for the period of at least seven days.

The fungibility option once exercised and disclosed by the issuer to public cannot be changed without the specific approval of SEBI. However, the issuer may decide to exercise the option without specific approval from SEBI.

The total number of IDRs available for fungibility during one fungibility window should be fixed before the opening of the window.

In case of conversion in excess of the limit available, the manner of accepting IDRs for conversion/ redemption or shares for re-issuance should be on proportionate basis.

SEBI has prescribed a reservation of 20 per cent of IDR conversion to retail Investors.

Fungibility was seen as a major issue with foreign companies in getting listed on domestic bourses. So far, only UK banking major StanChart has come out with their IDRs.