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RBI Operationalizes Indian Depository Receipts Rules

(Dow Jones)--India's central bank Wednesday put into operation rules allowing foreign companies to issue depository receipts in the country - a move which, though positive in the long run, analysts said may pressure domestic markets in the near term. Eligible companies resident outside India may issue Indian Depository Receipts through a domestic depository subject to companies rules and guidelines, the Reserve Bank of India said. Issue of IDRs enables foreign companies to raise funds by listing on Indian stock exchanges.

"At a time when we're struggling for capital and liquidity to sustain domestic growth, the flight of money to overseas markets may not help," said J.Moses Harding, head of global markets at IndusInd Bank. Harding said the move could pressure the Indian rupee in the near-term as the demand for dollars would go up. However, when the global economy recovers and investors regain confidence about putting their money in India, this channel could help the growth of the financial market, he said. "These are small, cautious steps toward capital convertibility. Greater foreign participation in Indian markets is definitely going to help us integrate better in the long run," said an economist with a local bank, who did not wish to be named. Standard Chartered PLC is one of the companies looking to raise at least $1 billion by listing in India, a person familiar with the matter told Dow Jones Newswires in April.

The RBI said a financial or a banking company with a presence in India which wants to issue IDRs it will need regulatory approval. Indian shares have been one of the better performers in the region in 2009, with the benchmark Sensex index gaining more than 53% so far this year. According to data from capital markets regulator, foreign institutional investors have been net buyers of over $6 billion of Indian shares. But a lack of confidence in foreign companies amid jittery global sentiment and uncertain economic environment could weigh on investor appetite for shares of these companies in India, analysts said. The RBI said the depository receipts will be rupee-denominated. Foreign institutional investors and non-resident Indians may purchase them, subject to the guidelines on foreign exchange management. The IDRs can't be redeemed into underlying equity shares within one year from the date of issue, it said. The proceeds of the issue must be immediately repatriated outside the country by the issuing company.