With investors deprived of an arbitrage opportunity, Indian Depository Receipts (IDR) of Standard Chartered Plc crashed 17.5% on Monday to R94.50 on the Bombay Stock Exchange after the capital market regulator barred the conversion of IDRs into underlying shares. Several foreign institutional investors had held on the IDRs, because of the fairly attractive arbitrage opportunity and were betting on fungibility.
Shares of the bank are currently listed in Hong Kong and London. At the close of market hours in Mumbai, StanChart IDRs were quoting at a 19.3% discount to the shares on the London Stock Exchange (LSE) which was 15.96 pounds. Since one share is equal to 10 IDRs, the price when adjusted and converted at current exchange rates works out to R117.2 as compared to R94.50 for the IDR. On average, IDRs have been trading at a discount of 8% to the share on the LSE, over the past one year since it listed.
Market watchers believe this could be a big blow to the future of the IDR as an instrument. Said a senior fund manager: ?Both ADRs and GDRs are fungible and these are global practices. So it?s surprising that Sebi is disallowing conversion of IDRs into shares.? Added another fund manager: ?There is nothing wrong with arbitraging across markets and from now on, the response to IDR issues may be muted.?
Others, however, believe that the IDR market should not get affected because from now on, investors will not price in an arbitrage and will value the IDR on its own.
The bank attempted to play down the issue. Neeraj Swaroop, regional CEO (India & South Asia), Standard Chartered Bank said: ?We note that the guidelines for IDR fungibility have been clarified by Sebi. We have been very pleased with investor interest in our IDR, both at launch and subsequently and we believe IDRs have a good future as fund-raising and investment vehicles in India.?
IDRs are depository receipts denominated in Indian rupees entitling the owner a fixed number of shares. In StanChart’s case, one share is equal to 10 IDRs. Standard Chartered is the only company to have issued IDRs in India in May 2010. Among domestic funds that had picked up IDRs in the nearly $1-billion issue were HDFC Asset Management, ICICI Prudential AMC, Reliance Mutual Fund and Fidelity MF.
At the time of the issue, Sebi had stipulated a lock-in period of one year for IDRs, saying it would review the issue of fungibility after observing volumes in the counter.
On Friday, the regulator barred any such conversion since the turnover in the counter had been sufficient enough so as not to term it illiquid. The Sebi ruling noted that IDRs shall be deemed to be ?infrequently traded? if the annualised trading turnover during six calendar months, is less than 5% of the value of the listed IDRs; in this case, the turnover was found to be 48.65% of the IDR issuance. ?The extant regulatory frame work does not permit fungibility but only redemption. Therefore, allowing redemption freely in the absence of two-way fungibility could result in the reduction of the number of IDRs listed, thereby impacting its liquidity in the domestic market, the Sebi circular said.