Indian Vaporised Receipts

I have an opinion piece in FT.com Indian Vaporised Receipts (subscription required), discussing the utter confusion which the new rules of the securities regulator created in my head. SEBI passed a fatwa against converting/redeeming Indian Depository Receipts (IDRs) into underlying shares - unless the IDRs were illiquid. In other words, IDRs can be permitted to be more illiquid if they are illiquid. I don't get it at all, I must confess. Here are some excerpts:

The concept of Indian Depository Receipts or IDRs was a butt of many jokes for several years after the regulatory framework for such instruments was introduced in 2004. People either thought that it was an outrageous idea that no one would subscribe to or that some vague unheard of third world company unable to raise money in its own country would be the only possible candidate. Both these assumptions were proven wrong when the UK based and London and Hong Kong listed Standard Chartered Bank issued IDRs in the Indian market in 2010. With a seventh of its profits coming from India, listing here made good sense to the company.
Most jurisdictions permit movement from receipts to shares and the other way round. With India’s capital controls in place that is not a given and the rules expressly prohibit fungibility or two way conversion between receipts and shares. Conversion of IDRs into shares has been permitted subject to certain conditions. Those conditions changed last week with a Securities and Exchange Board of India’s (SEBI) circular.
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Few laws have confused me as much lately as this new rule of SEBI on conversion of IDRs into underlying shares. The new circular mandates that IDRs can be redeemed into underlying shares only if the IDRs are illiquid and then they can be converted in a company sponsored 30 day window where investors can tender their IDRs and get shares in return. The seeming logic of the move is that redemptions in the absence of two way fungibility would dry up liquidity in the Indian market of IDRs and therefore some restraint on the one way redemption would help in retaining liquidity in the Indian market. This is a bit like the Greek mythology’s Procrustean bed where people were chopped or stretched to fit the bed.
I thought the way to liquidity in IDRs was a) not through a fatwa and b) low liquidity could be a logical reason to ban conversions as there would be even less liquidity with conversions - rather than be a trigger for conversion and thus even lesser liquidity.
Apart from the logical fallacy, my view of course is that there ought to be two-way fungibility of IDRs into shares and shares into IDRs - which can be capped at the original figure – if say 25 per cent of the market cap is in IDRs, the central bank could allow two way fungibility subject to the 25 per cent cap.
The SEBI circular in fact creates a mid way policy change and has resulted in a major fall in the price of India’s only IDR security. It also creates illiquid securities, that too for the avowed purpose of having a liquid IDR market. In other words the new policy makes a liquid market to become liquid – and the lack of liquidity would in fact trigger an even allowing even less liquidity in the instrument. For all the good intentions, we probably now need to bring back some of the old jokes on IDRs.

Note: In my view this policy change does not have SEBI's liberal signature - I suspect this was authored elsewhere - with a request to SEBI to sign it under its own name.