Channel: Markets

Tuesday, November 30, 2010
Indian Depository Receipts - introducing a paradigm shift
The high growth markets such as India are progressively moving up the value curve and it was clearly visible during the recent roadshow that Bombay Stock Exchange and a number of other partners organised.

The high growth markets such as India are progressively moving up the value curve and it was clearly visible during the recent roadshow that Bombay Stock Exchange and a number of other partners including AZB & Partners, Bank of New York Mellon, JM Financial, KPMG, Standard Chartered and ETI Dynamics organised in London.


Indian Depository receipts are Indian rupee denominated securities that international listed/public corporates may utilise to raise capital from the Indian public markets. The depository receipt issued by a regulatory body represents a set of underlying shares of the international company listed on a foreign exchange. Investors in India are able to access the stock through the Indian depository receipts that would trade on a leading Indian stock exchange.


In June 2010, Standard Chartered Bank became the first and currently the only one such institution to raise over USD 500mn from the Indian capital markets. This transaction has more than one significance. First it sends a very strong signal to other financial services institutions of the importance of the Indian market. Second it proves to the world that there is tremendous liquidity and depth in the Indian capital markets to absorb large issues. This is further exemplified by the activities of the year. Since July 2010, the capital markets have delivered more than USD 5billion through 24 IPOs. The largest amongst the lot Coal India, raised more than USD 3.5bn which is to-date the largest IPO in the country’s history. The third major and perhaps arguably the most important reason why an international company would raise capital from the Indian markets is to strengthen their brand equity across the board. The extremely public and retail nature of the IPOs in India means that the company’s brand will get splashed across the nation, and most likely to a subscriber group that they may never be able to reach out in the normal course of marketing.


Other benefits include better relations with the regulators, gaining a currency through which a corporate may make acquisitions and/or reward its stakeholders.


But the IDR as a product is also very much in its early days and will evolve in the coming years as more and more issuers queue up. There are still a number of areas that need to be improved which the regulators may have missed altogether.


For Standard Chartered as an institution using this product is very unique given its historic linkage with the markets and more importantly the fact that close to a quarter of its profits come from the Indian market alone. But for others that may not yet have the same presence as the Bank, they could find the sailing full of hurdles.


Currently only those companies listed on the main board of London Stock Exchange or similar exchanges that are regulated by an independent regulator such as the Financial Services Authority are allowed to issue an IDR. This means that the companies on junior markets such as AiM may have to wait a bit longer before the Indian regulators allow them. But there is a case that these companies could argue in front of the Indian regulators given the ongoing compliance requirements for IDRs are very much in line with what the home country regulator will want from them.


Another limitation of the IDR product, and one that is the most counter-intuitive, is that the issuer must take the proceeds out of India. Whilst most issuers would use the IDR as a way to further strengthen their franchise in India, the Indian regulators feel that the proceeds must be for used for corporate purposes. If the corporate is committed to growing their business in India then they must as a normal course plan to invest using established FDI channels.


But both of these issues are not insurmountable and the experience of all the advisors that worked on the Standard Chartered transaction is that the Indian regulators will be genuinely happy to discuss with prospective issuers how to overcome these limitations or barriers.


The Indian capital markets stakeholders must congratulate themselves for successfully bringing this product to the market as they join the elite club of Depository Receipts. It is a forceful demonstration of the maturity of the Indian regulatory framework and takes the country a step towards capital account convertibility.

IDR Presentations and Handbook

To receive a copy of the IDR presentations and the handbook given at the London Roadshow please send an email with full contact and business details to:

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