Last year, SEBI issued a circular that imposed some curbs on redemption by holders of Indian depository receipts (IDRs). Under that circular, redemption was permitted only if the IDRs are infrequently traded on the stock exchanges in India. This was a method of limiting exit options to investor exclusively to the Indian markets, except where they are illiquid (in which case conversion into underlying shares and sale on foreign markets will be permissible). This was considered to be highly restrictive to IDRs as an investment opportunity. In any event, the instrument does not appear to have met with any success given that there is only one company that has thus far listed its IDRs on the Indian exchanges.
SEBI has now issued another circulardated August 28, 2012 that permits partial fungibility of IDRs. The objective is “to improve the attractiveness of IDRs as an instrument thereby ensuring long term sustainability of IDRs ...” Under the revised regime, redemption/ conversion of IDRs into underlying equity shares is permissible up to the extent of 25% in each financial year.
While this provides some headroom for fungibility, it is unlikely to result in any significant expansion of the market for IDRs. In that sense, it is only a limited step.Update: The Reserve Bank of India has also issued a circular giving effect to limited two-way fungibility of IDRs.