Background
Indian Depository Receipts (IDRs) represent a unique financial instrument that enables foreign companies to raise capital in Indian markets without establishing a physical presence or undergoing full-fledged listing in India. Governed by Section 390 of the Companies Act, 2013 and Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, IDRs serve as a bridge between international corporations and Indian investors, facilitating cross-border capital flows while maintaining regulatory oversight.
Compliance Requirements
Section 390 grants the Central Government rule-making authority to govern four critical aspects of IDRs: the offer framework, disclosure requirements in prospectus or offer letters, operational mechanisms involving depositories and intermediaries, and the procedures for sale, transfer, or transmission of IDRs. This comprehensive empowerment enables creation of a complete regulatory ecosystem for cross-border capital raising through depository receipts.
Rule 13 operationalizes Section 390 by establishing detailed eligibility criteria, procedural requirements, and operational guidelines. The rule explicitly mandates compliance not only with Companies Act provisions but also with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and Reserve Bank of India directions, creating a multi-layered regulatory framework addressing securities law, foreign exchange regulations, and corporate law simultaneously.
Definition and Structure
IDR Defined
Rule 13 Explanation defines IDR as “any instrument in the form of a depository receipt created by a Domestic Depository in India and authorized by a company incorporated outside India.” This definition emphasizes three critical elements: creation by an Indian entity (Domestic Depository), authorization by the foreign issuer, and the instrument’s nature as a depository receipt rather than direct equity.
Key Participants
Issuing Company: The foreign corporation incorporated outside India, regardless of whether it has or will establish any business presence in India. This flexibility allows purely foreign entities to access Indian capital markets.
Domestic Depository (per Rule 13(3) Explanation): A custodian of securities registered with SEBI and specifically authorized by the issuing company to issue IDRs, acting as the Indian-side repository and facilitator.
Overseas Custodian Bank (per Rule 13(3) Explanation): A foreign banking company that holds the actual underlying equity shares against which IDRs are issued, maintaining custodial arrangements with the Domestic Depository or establishing presence in India.
Merchant Banker (per Rule 13(3) Explanation): A SEBI-registered intermediary as defined in SEBI (Merchant Bankers) Regulations, 1992, managing the issue process, due diligence, and regulatory filings.
Eligibility Criteria
Financial Thresholds – Rule 13(2)(a)
Foreign companies must demonstrate substantial financial standing through dual requirements:
Pre-issue capitalization: Minimum paid-up capital and free reserves of US$ 50 million, ensuring only financially significant entities access Indian markets and protecting investors from under-capitalized ventures.
Market capitalization: Minimum average market capitalization of US$ 100 million calculated over the preceding three years in the parent country. This three-year averaging requirement ensures sustained market value rather than temporary spikes, indicating genuine investor confidence in the company’s home market.
Trading History – Rule 13(2)(b)
The foreign company must have been continuously trading on a stock exchange in its parent or home country for at least three immediately preceding years. This requirement serves multiple purposes: demonstrates regulatory compliance in the home jurisdiction, provides a track record of price discovery and liquidity, ensures availability of historical financial data, and reduces risk of fly-by-night operators accessing Indian markets.
Profitability Track Record – Rule 13(2)(c)
The issuing company must demonstrate distributable profits (as defined in Section 123 of the Companies Act) for at least three out of the immediately preceding five years. This flexible profitability test (3 out of 5 years rather than continuous profitability) recognizes business cycles while ensuring general financial health. The reference to Section 123 aligns profit determination with Indian corporate law standards for dividend distribution.
SEBI-Prescribed Criteria – Rule 13(2)(d)
Beyond statutory minimums, SEBI retains authority to impose additional eligibility criteria, providing regulatory flexibility to address evolving market conditions, sector-specific requirements, or emerging risks without requiring legislative amendments.
Issue Procedure
Home Country Approvals – Rule 13(3)(a)
The issuing company must obtain necessary approvals or exemptions from authorities in its country of incorporation under relevant laws governing capital issuance and depository receipts. This ensures the issue doesn’t violate the company’s home jurisdiction regulations and protects IDR holders from potential legal challenges to the issue’s validity under foreign law.
SEBI Prior Approval – Rule 13(3)(b)
Prior written approval from SEBI is mandatory before issuing IDRs, covering both the issue itself and the issue size. This gatekeeping function enables SEBI to assess market conditions, investor protection adequacy, and compliance with regulatory standards before permitting the offering.
Application Timeline and Documentation – Rule 13(3)(c)
Applications must be submitted to SEBI at least 90 days before the issue opening date, accompanied by the draft prospectus. The form, fee, and information requirements are SEBI-specified, allowing regulatory flexibility in documentation standards.
The proviso mandates filing of a due diligence report through a Merchant Banker in SEBI-specified format. This independent professional verification provides SEBI with expert assessment of the issue’s merits, risks, and compliance status, enhancing regulatory scrutiny beyond the issuer’s own disclosures.
SEBI Review Process – Rule 13(3)(d)
SEBI may request additional information or explanations within 30 days of receiving the application and must dispose of the application within 30 days of receiving such additional information. This creates a maximum initial review period of 60 days with potential extension for information requests.
The proviso establishes that if SEBI specifies changes to the draft prospectus within 60 days of submission, the prospectus cannot be filed with SEBI or the Registrar of Companies until those changes are incorporated. This ensures regulatory concerns are addressed before public offering commences.
Issue Fee Payment – Rule 13(3)(e)
Upon SEBI approval, the issuing company must pay a SEBI-prescribed issue fee. This cost-recovery mechanism funds regulatory oversight while creating a financial commitment indicating serious intent.
Prospectus Filing – Rule 13(3)(f)
The issuing company must file a prospectus with both SEBI and the Registrar of Companies, New Delhi (centralizing foreign company registrations in the national capital). The prospectus must be certified by two authorized signatories: one whole-time director and the Chief Financial Officer, ensuring senior management accountability for disclosure accuracy.
The prospectus must state particulars of the board resolution approving the issue, creating an audit trail to the governance approval.
The proviso requires attaching copies of SEBI approval and fee payment evidence when filing with the ROC, enabling the ROC to verify regulatory clearance before accepting the filing.
Prospectus Signatories – Rule 13(3)(g)
The prospectus filed with SEBI and ROC must contain particulars prescribed in Rule 13(8) (detailed disclosure requirements) and be signed by all whole-time directors and the Chief Financial Officer. This broad signatory requirement (all whole-time directors, not just one) creates comprehensive management accountability for prospectus contents.
Intermediary Appointments – Rule 13(3)(h)
The issuing company must appoint three mandatory intermediaries:
Overseas Custodian Bank: Holds the underlying equity shares outside India Domestic Depository: Creates and manages IDRs in India Merchant Banker: Manages the issue process, due diligence, and regulatory compliance
These appointments create a structured intermediary framework ensuring professional handling of the cross-border transaction.
Optional Underwriting – Rule 13(3)(i)
The company may appoint SEBI-registered underwriters to underwrite the issue, providing subscription assurance. The requirement for SEBI registration ensures underwriters meet Indian regulatory standards for financial capability and professional conduct.
Share Delivery Mechanism – Rule 13(3)(j)
The issuing company must deliver underlying equity shares to the Overseas Custodian Bank, which then authorizes the Domestic Depository to issue IDRs. This two-step custody arrangement ensures IDRs are backed by actual shares held in a regulated custody chain, preventing creation of unbacked receipts.
Listing Permission – Rule 13(3)(k)
The company must obtain in-principle listing permission from one or more stock exchanges with nationwide trading terminals in India. The nationwide terminal requirement ensures broad investor access rather than limiting trading to regional exchanges.
Registration and Filing Requirements
Merchant Banker’s Filing Obligations – Rule 13(4)
The Merchant Banker must deliver specified documents to both SEBI and the ROC New Delhi for registration, serving as the central filing agent and creating professional accountability for filing completeness:
Constitutional Documents – Rule 13(4)(a): Instruments constituting or defining the issuing company’s constitution, enabling Indian regulators to understand the foreign company’s governance structure.
Incorporation Laws – Rule 13(4)(b): Enactments or provisions under which incorporation was effected, with attested copies by a company officer. This enables verification that the company was validly created under foreign law.
Indian Office Address – Rule 13(4)(c): If the company has established a place of business in India, the principal office address must be disclosed for communication and service of process.
Document Inspection Address – Rule 13(4)(d): If no principal place of business exists in India, an Indian address where constitutional documents and incorporation laws are available for public inspection must be provided. For non-English documents, certified translations by a Key Managerial Personnel must be maintained, ensuring accessibility to Indian stakeholders.
Incorporation Certificate – Rule 13(4)(e): A certified copy of the foreign incorporation certificate, evidencing the company’s valid existence in its home jurisdiction.
Custodial Agreements – Rule 13(4)(f): Copies of agreements between the issuing company, Overseas Custodian Bank, and Domestic Depository. These agreements must specify rights to be passed on to IDR holders, creating transparency about the economic and voting rights IDR holders will enjoy.
Translation Requirements – Rule 13(4)(g): For any non-English document, a translation certified by a Key Managerial Personnel and attested by an authorized officer of the Embassy or Consulate of the foreign country in India must be attached. This diplomatic attestation ensures translation accuracy and authenticity.
Application Forms and Investor Protection
Salient Features Memorandum – Rule 13(5)(a)
No application form can be issued unless accompanied by a memorandum containing salient features of the prospectus in the specified form. This ensures investors receive key information in a standardized, easily digestible format alongside the application form, preventing uninformed subscriptions.
Underwriting Exception – Rule 13(5)(b)
Application forms issued for underwriting agreements may be circulated without the salient features memorandum, as underwriters are sophisticated parties negotiating subscription commitments rather than retail investors requiring standardized disclosure.
Expert Consent – Rule 13(5)(c)
If the prospectus includes statements purporting to be made by an expert, it cannot be circulated unless the prospectus contains a statement that the expert has given written consent to the inclusion and has not withdrawn consent before prospectus delivery to SEBI and the ROC. This prevents unauthorized use of expert opinions and ensures experts stand behind their statements through the offering period.
Liability for Misstatements – Rule 13(5)(d)
Companies Act provisions regarding liability for prospectus misstatements and punishment for fraudulent inducement to invest apply to IDRs. This imports the domestic legal framework for prospectus liability to foreign issuers, creating accountability equivalent to Indian companies and enabling enforcement through Indian courts.
Safe Harbors from Liability – Rule 13(5)(e)
Persons responsible for the prospectus avoid liability for non-compliance if they prove either:
No knowledge: They had no knowledge of the undisclosed matter, establishing a knowledge-based defense requiring proof of genuine ignorance.
Immateriality: The Central Government or SEBI opines the contravention concerned immaterial matters, allowing regulatory discretion to excuse technical violations not affecting investor decision-making.
These defenses balance accountability with recognition that not all omissions or errors justify penalties.
IDR Holder Rights and Operations
Transfer, Redemption, and Reissuance – Rule 13(6)(a)
IDR holders may:
Transfer IDRs: Subject to applicable regulations, facilitating secondary market liquidity.
Redeem IDRs: Request the Domestic Depository to convert IDRs back to underlying equity shares, providing an exit mechanism.
Seek Reissuance: Convert underlying equity shares back into IDRs, enabling flexibility.
All actions are subject to the Foreign Exchange Management Act (FEMA), 1999, SEBI Act, 1992, and regulations/guidelines thereunder, ensuring foreign exchange and securities law compliance.
Redemption Procedure – Rule 13(6)(b)
Upon redemption request, the Domestic Depository requests the Overseas Custodian Bank to release corresponding underlying shares either for direct sale on behalf of the holder or transfer in the issuing company’s books in the holder’s name. A copy of this request is sent to the issuing company for information, maintaining transparency.
This mechanism enables IDR holders to realize value through either sale proceeds or direct shareholding in the foreign company, depending on their preference and FEMA permissions.
Nomination Rights – Rule 13(6)(c)
IDR holders may nominate a person to whom IDRs will vest upon death, with Form FC-5 available for this purpose. This succession planning provision protects holders’ estates and ensures smooth transmission.
Operational and Regulatory Requirements
Repatriation of Proceeds – Rule 13(7)(a)
Repatriation of IDR issue proceeds is subject to foreign exchange laws, ensuring RBI oversight over capital outflows and compliance with India’s exchange control regime.
Issue Size Limitation – Rule 13(7)(b)
Underlying equity shares offered through IDR offerings in any financial year cannot exceed 25% of the post-issue number of equity shares. This cap prevents excessive dilution of the foreign company’s shareholder base through Indian offerings and maintains balance between home country and Indian investor bases.
Currency Denomination – Rule 13(7)(c)
Regardless of the issuing company’s home currency denomination, IDRs must be denominated in Indian Rupees. This eliminates currency risk for Indian investors in the IDR instrument itself (though underlying share value may fluctuate with exchange rates) and simplifies pricing and trading.
Listing and Trading Restrictions – Rule 13(7)(d)
IDRs must be listed on specified recognized Indian stock exchanges per Rule 13(3)(k) and may be purchased, possessed, and freely transferred by persons resident in India (as defined in FEMA Section 2(v)), subject to FEMA provisions.
The proviso permits non-residents to purchase, possess, and transfer IDRs if the issuing company obtains specific RBI approval or complies with RBI policies/guidelines. This default prohibition on non-resident trading (with exception mechanism) prevents circular trading and ensures IDRs primarily serve their intended purpose of enabling Indian investors to access foreign companies.
Continuous Disclosure – Rule 13(7)(e)
Issuing companies must comply with SEBI-specified continuous disclosure requirements, ensuring ongoing transparency about financial performance, material events, and corporate actions comparable to Indian listed companies.
Distribution of Corporate Benefits – Rule 13(7)(f)
Upon receiving dividends or other corporate action benefits, the Domestic Depository must distribute them to IDR holders in proportion to their holdings. This ensures IDR holders receive economic benefits corresponding to their proportionate interest in underlying shares, maintaining parity with direct shareholders.
Prospectus Disclosure Requirements – Rule 13(8)
General Information – Rule 13(8)(a)
Comprehensive disclosure required including:
Company Details: Registered office name and address Intermediary Information: Details of Domestic Depository, Overseas Custodian Bank (with Indian office address), Merchant Banker, underwriters, and other intermediaries Stock Exchange Listing: Names and addresses where listing applications are made Legal Provisions: Punishment provisions for fictitious applications Investor Protection: Refund declarations for excess subscription, allotment timeline commitments Issue Timeline: Opening, closing, and earliest closing dates Underwriting Adequacy: Merchant Banker’s declaration regarding underwriter resources Fund Custody: Separate domestic bank account details for issue proceeds Utilization Plans: Proposed use of IDR proceeds
Capital Structure – Rule 13(8)(b)
Complete disclosure of authorized, issued, subscribed, and paid-up capital, enabling investors to understand the company’s equity structure and the IDR issue’s impact.
Terms of Issue – Rule 13(8)(c)
Critical terms including:
Issue Particulars – Rule 13(8)(d)
Disclosure of issue objectives, project costs (if any), and financing means including promoter contributions, creating transparency about capital deployment.
Company, Management, and Project Information – Rule 13(8)(e)
Extensive disclosure requirements including:
Business Information: Main objects, history, and current business Ownership Structure: Promoters/parent group background, or if no identifiable promoters, details of all 5% or more shareholders as SEBI-specified Group Structure: Subsidiary information Management Details: Complete board and key officer information Project Specifics: Location, facilities, technology, implementation schedule, progress Product/Market Information: Products, consumers, industrial users Risk Factors: Defaults, legal issues, and perceived risks Intermediary Consents: Confirmations from all associated intermediaries Trading History: SEBI-specified information about listing and trading on all stock exchanges globally
Financial Reports – Rule 13(8)(f)
Complex dual-track reporting requirements based on whether the home country requires statutory audits:
For Countries Requiring Statutory Audits – Rule 13(8)(f)(i): Statutory auditor’s report in SEBI-specified form on:
First Proviso: If the gap is 180 days or less, a statement of material changes (in SEBI-specified form) satisfies interim reporting requirements.
Second Proviso: For foreign banks incorporated outside India regulated by members of the Bank for International Settlements or International Organization of Securities Commissions (IOSCO signatories to the Multilateral Memorandum of Understanding), limited review reports satisfy interim reporting requirements rather than full audits.
For Countries Not Requiring Statutory Audits – Rule 13(8)(f)(ii): Report certified by a Chartered Accountant in practice (per Chartered Accountants Act, 1949) in SEBI-specified form on:
Report Timing – Rule 13(8)(f)(iii): The gap between issue opening and report date cannot exceed 120 days, ensuring current financial information.
Investment in Other Entities – Rule 13(8)(f)(iv): If proceeds will be invested in other corporate bodies, those entities’ names, addresses, and financial reports (per the above requirements) must be disclosed, creating transparency through the capital deployment chain.
Other Information – Rule 13(8)(g)
Minimum subscription requirements, intermediary fees and expenses, and FEMA compliance declarations must be disclosed.
Document Inspection – Rule 13(8)(h)
Location where offer documents, financial statements, and audit reports can be inspected during business hours must be specified, enabling investor due diligence.
Additional Regulatory Disclosures – Rule 13(8)(i)
Any additional information specified by SEBI, Income Tax Authorities, RBI, or other regulatory authorities must be included, creating flexibility for evolving disclosure standards.
mpanies Act corporate governance, SEBI securities regulation, FEMA foreign exchange controls, and RBI monetary policy—creates a comprehensive but complex ecosystem. The framework’s key strengths include strong disclosure requirements comparable to domestic offerings, professional intermediary involvement creating accountability layers, and flexible exit mechanisms through redemption and transfer rights.
However, the regulatory multiplicity, extensive documentation requirements, and coordination challenges may explain limited practical adoption. Foreign companies seeking Indian capital may find alternative routes (direct listing, FDI, or offshore offerings to Indian investors) more streamlined, suggesting the IDR framework, while theoretically robust, may benefit from procedural simplification to enhance practical utility.
Note: As per Section 391 (1) (ii), the provisions of sections 34 to 36 (both inclusive) shall apply to the issue of Indian Depository Receipts by a foreign company.
Penalty & Punishment
Fine of not less than Rs. 1,00,000/- on Foreign Company which may extend to Rs. 3,00,000/- and for continuing offence, an additional fine of Rs. 50,000/- for each day of default after first and every officer of the company in default will be punishable with fine not less than Rs. 25,000/- and may extend to Rs. 5,00,000/-
Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article.