Fungibility Opens Revenue Vista For Uti

Two-way fungibility of Indian global depository receipts /American depositary receipts, which has become operational, is expected to benefit the Unit Trust of India (UTI) the most as it will be able to leverage on its huge holdings in companies having depository receipts listed abroad subject to availability of head room.

Head room means the number of ADRs/GDRs originally issued minus number of GDRs outstanding further adjusted for ADRs/GDRs redeemed into underlying shares and registered in the name of the non-resident investor(s).

The UTI is also likely to emerge as a major market-maker between the local and GDR markets. UTI officials said that the trust is working out modalities for the same as it has good inventory of local shares in many blue-chips which also have floated GDRs.

Analysts said the move will enable arbitraging and thereby increase liquidity in Indian issues in both, the local and the global markets.

The GDRs of large capitalisation firms such as ITC, Bajaj Auto, Reliance Industries and BSES may come back to life as there is good arbitrage opportunity in converting local shares into GDRs which are quoted at premium to the underlying shares, dealers said.

However, the UTI may not be able to benefit companies where there has been no or negligible conversion from ADR/GDR to domestic shares.

Infosys Technologies is one such example, where the premiums rule as high as 50 per cent at times but no conversion to domestic shares take place.

The domestic custodian have to notify the extent up to which re-issuance would be permissible - the redemption effected minus the underlying shares registered in the name of the non-resident investor with reference to original GDR issue and adjustment on account of sectoral caps/ approval limits.

Marketmen expect that the measures announced by the Reserve Bank of India (RBI) mid-February allowing two-way fungibility of global issues will create arbitrage opportunities in such scrips thereby creating additional volumes in local shares as well as GDRs/ADRs.

The move will also provide a window to overseas investors who do not want to deal directly in local shares in the domestic market but yet intend to take exposure to Indian equities.

A dealers at an institutional broking house said overseas investors interested in taking exposure in such GDRs may buy local shares and re-convert them into GDRs.

Two-way fungibility implies that an investor can convert ADRs/GDRs into local shares and re-convert local shares into ADRs/GDRs up to a limit of the original ADR/GDR issue.

No specific permission is required from the RBI for re-conversion of shares into ADRs/GDRs. Re-conversion of shares into ADRs/GDRs will be distinct from portfolio investments made by foreign institutional investors.

The RBI issued guidelines for two-way fungibility of Indian GDRs/ADRs last fortnight. It has permitted re-issue of ADRs/GDRs to the extent of original instruments that have been converted into local underlying shares which may have been sold in the domestic market.