Global Finance Majors Set To Play On Fungibility

Global financial institutions such as Citibank, Bankers Trust, Deutsche Bank and Bank of New York, who have both custodial and depository services world over, are gearing up to leverage the opportunity afforded by two-way fungibility of American/global depository receipts (ADRs/GDRs).

Deepak Bagia, vice-president, ADRs/GDRs, Citibank, said: "The role of custodians depository holders will be now more of a link than mere facilitators of the services. Companies will become more investor savvy with expectation of frequent conversions of the ADRs/GDRs into domestic shares and vice-versa since custodians and depository banks will be the only link with the investors for the companies."

According to the guidelines of the Reserve Bank of India (RBI) for conversions of ADRs/GDRs and vice versa, a non-resident investor places a request with his foreign broker or an Indian local broker for depository receipts through the re-issuance route. The foreign broker contacts his counterpart in India to purchase the local shares for conversion.

The broker approaches the domestic custodian for approval under the available head room, which once verified is communicated to the broker for execution of his purchase within 3 days of the approval. The broker is required to submit the copy of the contract note to the domestic custodian along with beneficiary details latest by 11.00 am on T+1 basis.

The broker then again has to deposit the shares with the domestic custodian on or before T+4. The domestic custodian then intimates the overseas depository to issue proportionate depository receipts to the beneficiary.

Thus during the entire process, domestic custodian and overseas depository bank have to be continuously involved and a synergy between the domestic custodian and overseas depository becomes important.

Citibank has presence in both domestic custodial services and also global depository services, making it the most attractive for easy and fast process flow, Viraj Kulkarni, vice-president, country manager, securities pointed out.

Last week a significant amount of domestic shares were converted to GDRs in India Cements, Reliance Industries and Ranbaxy Laboratories. Till the operative guidelines were put in place only conversions of ADRs/GDRs into domestic shares was allowed.

The long awaited two-way fungibility will help in developing two-way business and should also step up interest among international investors. Additionally, along with foreign institutional investors (FIIs), this mechanism will enable non-resident Indians to access the local bourses.

A direct fall out of the two-way fungibility process is that it will limit the arbitrage difference that prevail in share prices of companies that are listed on the international as well as Indian bourses.

The two-way fungibility guidelines of RBI issued in February enable a non-resident investor to buy local shares of an Indian company through an Indian stock broker and convert them into ADRs/GDRs eligible to be traded on the international stock exchanges.