Companies Act Section 390

Companies Act, Section 390: Offer of Indian Depository Receipts (IDRs) by Foreign Companies

Section 390 of the Companies Act, 2013, deals with the legal framework for the offer and regulation of Indian Depository Receipts (IDRs). This provision empowers the Central Government to frame rules to govern every aspect of IDRs, which are financial instruments issued in India by companies incorporated outside India.

An Indian Depository Receipt (IDR) is essentially a negotiable financial instrument denominated in Indian Rupees, issued by a domestic depository against the underlying shares of a foreign company. It enables Indian investors to invest in foreign companies without having to directly trade in overseas securities.

This section ensures that the offering, issuance, and management of IDRs are subject to proper regulation, transparency, and investor protection.

1. Overriding Effect

The section begins with a non-obstante clause (“Notwithstanding anything contained in any other law for the time being in force”). This means that the powers granted under this section take precedence over any other inconsistent provisions in existing laws.

Therefore, even if other statutes contain provisions on securities, deposits, or foreign offerings, the rules framed by the Central Government under Section 390 will govern IDRs.

2. Rule-Making Power of the Central Government

The Central Government is authorized to make rules on the following specific matters relating to IDRs:

(a) Offer of Indian Depository Receipts

The Government may prescribe the procedure, eligibility conditions, and compliances for a foreign company to offer IDRs in India.
This includes determining which companies can issue IDRs, the conditions for approval, and the limits on such offerings.
For example, the rules may require a minimum track record of profitability, net worth, or compliance history before a foreign company is permitted to issue IDRs in India.
(b) Disclosures in Prospectus or Letter of Offer

Transparency is essential in securities markets. Therefore, the Government can require that any prospectus or letter of offer issued in connection with IDRs must include specific disclosures. These disclosures may include:
The financial position of the foreign company, risks associated with the investment, details of the underlying shares, rights of IDR holders, information about custodians, underwriters, and depositories handling the issue.
The intent is to ensure that Indian investors receive the same level of information and protection as they would when subscribing to securities of Indian companies.
(c) Treatment of IDRs in Depository Mode, by Custodian and Underwriters

IDRs must be issued and maintained in dematerialized form (i.e., in electronic mode with depositories) to ensure ease of trading, security, and transparency. The rules may also regulate the role of:
Custodians, who hold the underlying shares in the home country of the foreign company, underwriters, who ensure subscription to the issue of IDRs and provide stability to the offering, and depositories, who facilitate the holding and transfer of IDRs within India.
This provision ensures a clear chain of responsibility among intermediaries to protect the interests of investors.
(d) Sale, Transfer, and Transmission of IDRs

The Government may also specify how IDRs can be sold, transferred, or transmitted in India.
Rules under this clause may address:
The mechanism for secondary market trading of IDRs, procedures for transferring IDRs between investors, legal processes for transmission in case of inheritance, succession, or operation of law.
By doing so, the law ensures that IDRs function like other securities in India, making them investor-friendly and easily tradable.
3. Applicability to Foreign Companies

This section applies to a company incorporated or to be incorporated outside India, regardless of whether such a company has established or intends to establish a place of business in India.

This wide applicability ensures that even if a foreign company has no direct business operations in India, it can still raise funds from Indian investors through the mechanism of IDRs, provided it complies with the rules made under this section.