Sebi has once again kicked up a controversy with its latest ruling on the conversion of Indian Depository Receipts (IDRs) which will impact the market as it casts a shadow on the future of IDRs. In brief, the conversion norms now for IDRs say that they can be converted into shares after one year, provided the IDRs are illiquid, which is defined as annualised trading volumes being less than 5% of listed IDRs. As StanChart has a higher trading value of 48%, it is liquid and cannot be converted. Sebi?s stance is that if free convertibility is allowed, then liquidity in the IDRs would suffer as most would be converted into shares. If this was permitted, then, on June 11, ten IDRs would be converted to one equity share and the investors, which include institutional as well as non-institutional entities, could look forward to taking advantage of arbitrage opportunities between India, Hong Kong and London. Ironically, the only way it can be converted is if investors stop trading in the IDR for the next six months so that we near the 5% number!
The idea behind IDRs was to begin globalising our capital markets, to allow foreign companies to raise their brand image or financial resources, while our investors could invest in foreign shares without going through the cumbersome processes required for buying equity in overseas markets. This would have placed IDRs at par with GDRs and ADRs, and the development of this market could have taken the economy to a higher level, given that we are already seeing over $50 bn of foreign funds coming to India. By introducing this clause, we must necessarily have an illiquid IDR market for IDRs to succeed!
We need to ask ourselves whether we are in favour of having a vibrant IDR market. If the answer is yes, there should be ease in the way we transact and clarity on issues such as capital gains, voting rights (IDR holders do not have voting rights), fungibility, participation of insurance companies and so on. To be a bit charitable, we could justify Sebi?s stance by saying that this was an experiment and the regulator was keen on how it would work out. But by introducing this conversion clause, we may just be terminating this market as foreign companies will no longer see value in having their listings in India and would look at alternative markets in Asia. Even if they are open to issuing IDRs, given that the main motivation is brand building rather than fund raising, investors may not be too keen on the same. Besides, if investors are still interested in the pie, they can use the the RBI annual window of $200,000 and follow the investing processes and regulations in other countries to diversify their portfolios. An unfortunate turn of events.