The government is likely to make it easier for Indian investors to put money in depository receipts of foreign companies denominated in rupees. The instrument has failed to take off with only one company mopping up capital through it in over a decade of its existence.
The finance ministry may widen the scope of the Indian Depository Receipts (IDRs) in the upcoming Budget. It is likely to provide tax clarity on these instruments, treating them on par with domestic capital.
“Revamped IDRs will be launched soon. The revenue department is also on board,” said a finance ministry official who did not wish to be identified.
Like Indian companies mop up capital overseas through Global Depository Receipts (GDRs) and American Depository Receipts (ADRs), IDRs are derivative instruments with underlying assets denominated in rupees for foreign companies to raise money in India.
The ministry will take a cue from the report of a committee, headed by former whole-time Sebi director MS Sahoo, to be submitted this week. The committee is all set to recommend IDRs with underlying assets such as equity, debt and mutual fund units, whether sponsored or non-sponsored. Currently it is allowed only in case of equity and that too sponsored.
Sebi has also sent a detailed note to the finance ministry pressing for levy of Securities Transaction Tax (STT) in lieu of long term capital gains on IDRs, and if the short term capital gains for IDRs are to stay then the taxation should be at minimal rates.
“STT mandates tax deduction at source. This would eliminate any uncertainty on non-payment of tax ultimately freeing up the resources of tax authorities,” said an official.
Currently, both short term and long term capital gains taxes are imposed on IDRs, unlike Indian shares which are taxable only if capital gains are made within a year.
Due to lack of clarity on taxation, IDRs have not picked up since their launch in 2000. Standard Chartered Plc was the first and only foreign entity to tap this route for fund raising in 2010.
“Concessional tax treatment to IDRs would certainly aid the market as it would be an incentive for foreign companies to raise funds in India,” said Sanjay Sanghvi, Tax Partner, Khaitan & Co.
However, Anish Thacker, tax partner of EY, said tax clarity is only one problem of lacklustre IDR market, and other structural changes should also be made to attract investors. “If good firms can come out with issues, Indian investors have appetite for them,” he added.
The Sahoo committee will recommend structural changes in the IDR regime, taking the help from its earlier recommendations on ADRs and GDRs.
“It’s mirror image of our report on ADR, GDR. We must give same treatment to the foreign firms coming in as we give to Indian firms going out. The same is true of foreign investors coming in and our investors going out,” said a person familiar in know of the development.
However, there are likely to be a few differences as well between the two reports. In the report on ADRs/GDRs, the committee had suggested that both listed and unlisted Indian companies be allowed to tap the markets overseas. However, for IDR, it is likely to suggest that only listed overseas companies be allowed to tap Indian markets, which is the rule currently as well.
“When my companies are going abroad I don’t have to think about investor protection. The foreign jurisdiction should take care of that. But I have to protect the rights of Indian investors. As such, only listed companies will be allowed in to tap IDRs,” the source added.
For IDRs the committee would recommend a screening mechanism. There will be a consumer and investor protection framework which is not there in its recommendations on ADRs/GDRs. In other respects, the recommendations on IDRs would be in line with that on ADRs/GDRs.
In its recommendations on ADRs/GDRs, the committee had recommended local companies be allowed to issue DRs on all kinds of securities such as debt, equity and mutual fund units. Besides, it recommended issue of both sponsored and unsponsored DRs. Under the current regime, domestic issuers are not permitted to issue unsponsored DRs and also DRs with an underlying product other than equity. The other recommendation was that companies should also be allowed to issue DRs for non-capital raising purposes such as improving liquidity, valuation or creating visibility of their brand in international markets.
Sebi has written to the finance ministry to allow even insurance companies to invest in IDRs, which is not the case currently. Besides, the committee is likely to suggest that IDRs be allowed for non-capital raising as well.