In an unprecedented transaction of its kind, Standard Chartered Bank plc became the first organisation ever to raise capital through the use of Indian Depository Receipts (IDR). This depository receipt allows international companies to raise capital in India through public markets against the underlying shares of the company listed on another international exchange.
The bank opened its offering with a pricing band of Rs 100 – Rs 115 and fixed the price of one IDR at about Rs. 104 representing about 6-7% discount to the investors over its London pricing. The issue finally closed with the book two times over-subscribed and is set to begin trading on Bombay Stock Exchange and National Stock Exchange on 11th June 2010.
The issue may not make big splash in the world of capital markets but represents a significant event in the context of India and wider emerging markets. It demonstrates that for institutions such as Standard Chartered plc that have a huge emerging markets footprint and brand recognition, there is now an instrument that allows the organisations to tap into the domestic investor base of the country they are wanting to expand in. Other market exchanges should take notice. This event is equally important for domestic investors that otherwise may not be able to invest in international markets, but can now access a global blue-chip stock through their home markets.
“But bringing this transaction to market hasn’t been easy as there were dozens of regulatory hurdles to overcome”, according to Ranganath Char, Managing Director, JM Financial Consultants Pvt Ltd, who knows much about the history of the transaction. He has been working very closely with the Securities and Exchange Board of India (SEBI) and Standard Chartered for more than two years to smoothen the path for IDRs. For instance SEBI requires that the home country regulations of the issuer must match those in India. One such aspect is the number of disclosures required by SEBI that can sometime be more onerous than those required by other market regulators. A number of Asian exchanges have lesser disclosure requirements than those acceptable by SEBI making it impossible for a number of international issuers to consider signing up to the IDR programme. Even in the case of Standard Chartered SEBI had to be fairly flexible on a number of accounts. “Both the issuer and the regulator had to find a common ground in order to succeed, and the parties did rise to the challenge”, further adds Ranganath.
The listing demonstrates that the bank wasn’t really gunning for an IDR to raise capital but to deepen in its bonds with and commitments to India. Peter Sands, the Group CEO, said in a company press release that he was very proud of the heritage of Standard Chartered in the country. The bank has operated in the country for over 150 years.
The issue also opens some very interesting vistas for domestic investors as well as for global institutional investors that have an appetite for emerging markets such as India. The banking and financial services sector in India is poised for tremendous growth. There is a body of Indian investors that is not permitted to invest overseas or those that can only invest in large cap Indian stocks. An IDR listing of a large multinational firm is likely to create a huge demand from these investors putting the stock on a sure-shot growth trajectory.
“Standard Chartered’s stock in India is likely to witness far greater growth than its original list in London. It will not be surprising to see some investors selling the stock in London and buying it in India to capture this growth. There definitely will be a premium and value creation in the Indian market”, finally says Ranganath Char.
The issue is clearly an attempt by Indian exchanges to position Mumbai as an emergent financial centre. A number of multinationals operating in India have been watching this space closely. The real test for proponents of IDR will be to convince international issuers to take the plunge and for issuers to persevere through the process with the Indian regulator.