DR pricing under review

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In a move to revive the dormant American depositary receipt and global depositary receipt (ADR/GDR) market, particularly in the present falling markets, the ministry of finance is considering amendments to the pricing formula for companies intending to issue these instruments.

In falling markets, the current pricing norm effectively results in the overseas issue being priced farther from, and higher than, the prevailing domestic market price. Companies wishing to tap the overseas market may not do so as the offer price is notright.

According to present ADR/ GDR guidelines, the floor price of such papers has to be fixed on the basis of 30 days prior to the date of the shareholders’ meeting. Under this formula, the floor price fixed in a falling market often turns out to be unfavourable, since the share price of the company may have fallen by the time of issue.

Instead, the ministry of finance now suggests that for the purpose of determining the floor price, the relevant date should be the date of the board resolution for opening the issue, and the price on that day be considered the floor price for such issues.

In an internal note, the finance ministry states that this would effectively bring the issue price closer to the market price by 30 days. “We may have to incorporate it in ADR/ GDR scheme also to bring ADR/ GDR pricing in sync with domestic as well as FCEB issues,” the note adds.

Reactions to the proposal are, however, mixed. Certain sections of the market feel that it will revive the present dormant market for overseas papers. However, Gautam Chand, CEO, Instanex Capital, a firm that tracks developments in the ADR/GDR market closely, has a different view.

Speaking to FE, Chand said the proposed change in the pricing formula may work for companies whose stocks are not that liquid, but would not have the desired impact on the pricing of firms with liquid stocks who want to tap the ADR/GDR market, as the period of the relevant date is too long.

Chand said, “I’ve suggested a formula to the finance ministry, under which the floor price can be fixed on the basis of the weighted average price of five days prior to such issue. This will work wonders for liquid companies and will also take care of the ministry’s concern with respect to the interests of minority shareholders.”