Dividend, profitability norms eased for IDRs

In a bid to infuse life into the Indian depository receipts (IDR) market --which is yet to see a single float-- the government today eased several stringent clauses for foreign companies to raise funds by selling shares to Indian investors.

However, the new regulations, issued by the ministry of corporate affairs, also put a rider that foreign companies should have a three-year trading track record in the stock exchanges of their respective home countries to qualify for IDR issuances. This is to ensure that issuer is a known entity with a trading track record in a capital market.

Under the new rules, net worth and market capitalisation have been provided as the eligibility condition for IDR issuers, instead of the earlier net worth and turnover-based ceilings.

The earlier eligibility condition requiring the issuer to be making profits for at least five preceding years has been aligned with the Companies Act, 1956 and brought at par with the condition in this regard for domestic issues.

The new condition provides that issuer should have a track record of distributable profits in terms of Section 205 of the Companies Act, 1956, for at least three out of immediately preceding five years.

The earlier requirement of declaration of a minimum rate of dividend for last five years and a minimum 2:1 debt equity ratio have been omitted.

The government felt that these conditions, being specific to individual companies which may have adopted different dividend policies as permissible under their respective jurisdictions, can not be applied across the board.

The procedure in respect of approval by Sebi on IDR Applications has been restructured and made time bound.

The new easier norms come after no foreign companies tapped the IDR market, even after nearly three years of the IDR rules first coming into place.

With these amendments, the idea is to attract foreign companies who wish to tap Indian markets, Prem Chand Gupta, minister of corporate affairs told Business Standard.

The amendments in the rules come after the ministry of corporate affairs receiving requests from the Sebi and some market participants to review certain stringent requirements in the IDR regulations.

The ministry also took comments from the economic affairs, various industry chambers and professional institutes (ICAI, ICSI and ICWAI) before finalising the final easier rules for IDRs.

On stipulating net worth and market cap ceilings instead of earlier net worth and turnover-based ceilings, an official release said, the change was made with a view to facilitate better reflection of the financial sustainability/liquidity of the securities to be issued.

It has been provided that number of underlying equity shares offered in a financial year through IDR offerings shall not exceed 25 per cent of the post issue number of equity shares of the company. Earlier the condition in this regard was that IDRs issued in any financial year shall not exceed 15 per cent of its paid-up capital and free reserves.

The requirement in respect of continuous disclosure, which earlier provided that the quarterly audited financial results should be prepared and published in newspapers in the manner specified by the listing conditions, has been reviewed in light of the position that auditing regulation in various jurisdictions do not provide for quarterly audited financial results.