The Reserve Bank of India (RBI) has allowed foreign companies to raise money from the Indian stock markets through Indian Depository Receipts (IDRs) but barred them from doing automatic fungibility.

Banning fungibility means investors in any company that has issued IDRs won’t be able to freely convert the IDRs into underlying domestic shares. In the case of ADRs and GDRs issued by Indian companies abroad, two-way fungibility is already allowed. This involves conversion of ADRs/GDRs into domestic shares and reconversion of the domestic shares into ADRs/GDRs.

Earlier only one-way fungibility was allowed in the case of ADRs and GDRs — investors could convert their shares into underlying domestic shares but no reconversion was allowed. The RBI later allowed limited two-way fungibility to foreign investors.

A section of the investment community questioned the rationale of not allowing fungibility. “Foreign investors are allowed the facility abroad when Indian companies go for ADR or GDR issues. But when foreign companies come here with a similar instrument, Indian investors are not allowed the same facility of conversion and reconversion of the issuers’ shares,” said a market source.

Sebi had earlier said “the IDR issuing company should declare that the underlying equity shares, against which the IDRs are issued, have been or will be listed in its home country before the listing of IDRs in the stock exchange”. With the RBI and the Sebi now clearing the decks for IDR issues, some foreign companies are likely to test the Indian waters soon.

On Wednesday, the RBI said IDRs will have to be denominated in rupees and issue proceeds have to repatriated from India immediately. IDRs would be redeemable to investors only at the end of one year from the date of issue.

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