India said to limit depository receipt swap at $5 bn

India, which is framing rules to allow conversion between local depository receipts and foreign stock, might set a total limit of $5 billion on such two-way swaps, two officials with direct knowledge of the matter said.

A limit would curb price swings in shares, said the officials, who asked not to be identified, citing policy. The persons said the government will issue a notification this month listing the rules for such transactions in Indian Depository Receipts (IDRs). The security surged in Mumbai, bound for its highest level in three months.

Standard Chartered Plc is the only company with IDRs, with 10 of its receipts equaling one share traded in London, where the lender is based. Vodafone Group Plc, HSBC Holdings Plc and Citigroup Inc are among companies that may tap the Indian markets through IDR issuances, according to a research note dated June 25 by Edelweiss Securities Ltd.

“Allowing 100 per cent fungibility will narrow the spread and may result in no need for conversion by holders,” the Mumbai-based brokerage said. “This will aid retention of equity on domestic bourses and narrow the discount.”

Standard Chartered’s IDR, issued in May 2010 at Rs 104 ($1.9) each, closed at Rs 94 yesterday. That represents a discount of 24 per cent to its London share price. The IDR surged six per cent to Rs 99.7 at 3:07 pm.

Former finance minister Pranab Mukherjee, in his budget speech in March, signalled he would reverse a decision by the Securities & Exchange Board of India (Sebi) to impose curbs on the swaps. He said allowing “two-way fungibility” of IDRs will encourage greater foreign participation in the capital markets. Sebi had proposed a one-year waiting period after the issue of the IDRs for a 100 per cent swap, and later said conversions would be allowed only in case the IDRs are traded infrequently.