IDR is an instrument in the form of a depository receipt created by an Indian depository in India against the underlying equity shares of the issuing company, according to the Companies (Issue of Indian Depository Receipts) Rules, 2004. Foreign companies would issue shares to an Indian depository, such as the National Security Depository Limited (NSDL), which would then issue depository receipts to Indian investors. An Overseas Custodian would hold the actual shares underlying IDRs and authorize the Indian depository to issue IDRs.
IDR is a mechanism
Simply try to comprehend in a straightforward manner. An IDR is a mechanism that allows Indian investors to invest in listed foreign companies in Indian rupees, including multinational corporations. IDRs allow the holder to participate in the ownership of equity shares in a foreign company. IDRs are issued by a Domestic Depository in India and are denominated in Indian Rupees. They can be listed on any stock exchange in India. IDRs are available to anyone who can invest in an IPO (Initial Public Offering). In other words, IDRs are ADRs/GDRs for foreign investors in Indian companies, and ADRs/GDRs for Indian investors in foreign companies.
In India, an ordinary share has a par value (face value) of Rs.10 in general, though some shares issued earlier still have a par value of Rs.100. The value at which a share was originally recorded in the balance sheet as ‘equity capital’ (also known as ‘ordinary share capital) is known as par value. According to SEBI guidelines for public issues by individual promoters and entrepreneurs, all new companies must offer their shares to the public at par, i.e. at Rs.10. A new company founded by existing companies (and, of course, existing companies themselves) with at least five years of consistent profitability is allowed to issue premium shares.
A company can raise the required amount of capital from the public by issuing fewer shares when it issues shares at a premium. For example, a new company founded by first-time entrepreneurs seeking to raise $1 million must offer Rs.10 lakh ordinary shares at Rs.10 each (at par), whereas an existing company seeking to raise the same amount can do so by offering only 2 lakh shares at Rs.50 each (close to the market value of its shares).
The latter is said to have issued its shares at a subscription price’ of Rs.50 MO (vs. Rs.40 MO in the case of the former) (being the excess of subscription price over par value). In India, the company’s books of accounts will show Rs.10 in the share capital account and Rs.40 in the share premium account in this situation. It simply means that the higher the premium, the fewer shares a company will be required to service.
As a result of the 1993 policy of free pricing of issues, many companies issued issues at prices so high that they were often higher than their market prices, resulting in under-subscription of such issues. However, companies are quickly learning the dangers of excessive share pricing, and it will only be a matter of time before issue prices become more realistic.
Foreign Financial Investment
India’s capital market for foreign portfolio investment/foreign institutional investment (FPI/FII) opened in 1994, with 9,136 firms registered with the SEBI at the time. They are now one of the most important drivers of India’s financial markets, having invested approximately Rs.12.51 trillion (US$ 171.81 billion) in the country between FY02 and FY18. FIIs/FPIs have been drawn to the country because of its well-developed primary and secondary markets. SEBI regulates their investments, while the RBI maintains investment ceilings.
Hedge funds, foreign mutual funds, sovereign wealth funds, pension funds, trusts, asset management companies, endowments, university funds, and so on are all active in the market today.
Major regulatory initiatives
SEBI announced several regulatory changes to encourage safe and higher foreign portfolio investment in the country during 2018-19-
- Direct overseas listing of Indian companies allowed.
- The KYC (Know-Your-Client) requirement is relaxed.
- Foreign entities are allowed to participate in the commodity derivatives.
- NRIs are allowed to invest through the FPI route.
- The timeline for the public issue of debt securities was reduced to 6 days (from 12 days).
- FPIs are allowed to invest up to 25 percent in Category III Alternative Investment Funds (AIF).
- FPIs are allowed to invest in the Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
Today, investors see India as a potential opportunity, as the country’s economy has tremendous growth potential. FII investments have been strong and are expected to grow in the future, thanks to strong government support.
Classification: The FPIs have been classified by the SEBI into three broad categories, namely
- Category I: The government entities/institutions investing in the Indian security market on behalf of the Central Bank.
- Category II: The financial institutions, mutual funds, etc., which are duly regulated in the countries of their origin.
- Category III: The financial institutions which do not fall into either of the above-given categories.
Angel Investor
In India’s financial market, a new term was introduced in the Union Budget 2013-14, which stated that SEBI would soon prescribe the provisions by which angel investors could be recognized as Category I AIF venture capital funds.
An angel investor is a person who invests in entrepreneurs to help them start their business.’ Angel investors are often found among an entrepreneur’s family and friends, but they can also come from the outside. They may provide capital as a loan or as a one-time injection of seed money to help the company get through difficult times. In exchange, they may like to own a stake in the company (in the case of a loan they lend at more favorable terms than other lenders, as they are usually investing in the person rather than the viability of the business).
These investors not only provide investible capital but also provide technical advice and assist the start-up’ business with their lucrative contacts.
Rather than reaping a large profit from their investment, they are focused on assisting the company’s success. In terms of ‘intention,’ angel investors are the polar opposite of venture capitalists (who have high-profit prospects as their prime focus). However, both angel and venture investors serve the same purpose for the entrepreneur in one sense (who is in dire need of investible capital).
QFIs Scheme
For the first time in the Budget 2011-12, the government allowed qualified foreign investors (QFIs) who met the know-your-customer (KYC) requirements to invest directly in Indian mutual funds. The government expanded this scheme in January 2012, allowing QFIs to invest directly in Indian equity markets. Moving forward with the scheme, as announced in Budget 2012-13, QFIs are now allowed to invest in CDSs and MF debt schemes, subject to a total investment ceiling of US $ 1 billion.
QFIs were allowed to open individual non-interest-bearing rupee bank accounts with authorized dealer banks in India in May 2012 to receive funds and pay for transactions in securities they are eligible to invest in. The definition of QFI was expanded in June 2012 to include residents of Gulf Cooperation Council (GCC) and European Commission (EC) member countries, as the GCC and EC are both members of the Financial Action Task Force (FATF). The speedier moves in the area of promoting higher foreign investment (FIs) in India should be seen in the light of two broad perspectives, viz.,
- India’s rising current account deficit (which crossed an all-time high of 6.7 percent by March 2013) is creating a heavy drain of foreign exchange; and
- The objective of attract more FIs while the Western economies are under the spell of recession (cashing in the opportunity).
RFPI
With the goal of attracting inflows, the RBI simplified foreign portfolio investment norms in March 2014 by putting in place an easier registration process and operating framework. The existing portfolio investor classes, namely Foreign Institutional Investor (FII) and Qualified Foreign Investor (QFI) registered with SEBI, will be subsumed under the new term Registered Foreign Portfolio Investor (RFPI). The following are the new RFPI guidelines:
- They can buy and sell Indian company shares and convertible debentures through a registered broker on India’s recognized stock exchanges, as well as buy and sell shares and convertible debentures that are offered to the public in accordance with relevant SEBI guidelines.
- Such investors can purchase shares or convertible debentures in any bid for, or acquisition of, securities in response to a central government or state government offer for disinvestment of shares.
- These entities would be eligible to invest in government securities and corporate debt, subject to limits specified by the RBI and SEBI from time to time.
- Such investors would be permitted to trade in all exchange-traded derivative contracts on the stock exchanges, subject to the position limits as specified by SEBI from time to time.
- RFPI may offer cash or AAA-rated foreign sovereign securities, corporate bonds, or domestic government securities as collateral to recognized stock exchanges for cash and derivative transactions.
All investments made by that FIIs/QFIs in accordance with the regulations prior to registration as RFPI shall continue to be valid and taken into account for computation of aggregate limit.