ADR, GDR norms to make overseas loans easier

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Indian companies would find it easier to raise resources from the overseas equities market. The finance ministry has proposed changes in the pricing rules governing American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), which would help companies in pricing securities at competitive rates. This was reported by FE on July 25,” DR pricing under review”.

The changes would benefit companies now as prices are falling in the stock markets. The existing pricing rules block them into quoting a higher price for the securities than their actual market price. This makes it difficult for the overseas issues to succeed.

Currently, the ADR/GDR issue price is determined on the basis of the higher of the last six months’ average price or last 15 days’ average price. The finance ministry has now proposed to reduce it to the higher of the two months’ average price or the last 15 days average price. The new pricing rules are expected to reflect accurate—and more up to date – prices of the ADR/GDR issues.

ADR/GDR issues by Indian companies amounted to $999 million during April-May 2008 as compared with $16 million in the corresponding period last year, according to RBI data.

The government had put in the six months pricing norm to protect the interests of the minority shareholders but these rules have now become defunct with the Sensex falling 30% in the year so far. The changes in the pricing norms would minimise over-pricing of securities, helping them click.

The move would enable companies to give more realistic valuation to foreign investors in line with their domestic stock prices. It is significant at a time when funds for companies are not easily forthcoming from the domestic equity market. Moreover, a slew of monetary tightening measures in the recent months have made the domestic debt market far too costlier. Bankers say overseas issues will come in handy for companies constrained to meet their working capital requirements.

Further, it has proposed that the average price could be considered preceding the date of shareholders’ meeting, which authorises the company to raise funds through ADR and GDRs.

At present, the average price is worked out by considering share prices of the company in the domestic stock exchanges, preceding 30 days of shareholders’ meeting. This is also expected to take the overseas issue price closer to the domestic stock price of the issuing company.