Reverse Fungibility May Affect Arbitrage Opportunities

The reverse fungibility of the depository receipts issued abroad by Indian companies is expected to narrow down the price differential between the same assets listed in the domestic market and the overseas market, thereby bringing down the opportunities of arbitrage.

It will also impart liquidity to the fledgling global depository receipt (GDR) trading in most of the companies.

These were the conclusions arrived at a seminar 'Reverse fungibility' organised by the Bombay Stock Exchange (BSE) in Mumbai.

"The companies will now have to increase focus on investor relations to maintain a vibrant trading scenario in their depository receipts," said Deepak Bagla, vice-president, depository sales, Citibank, in his address.

He added that till now most of the companies raising funds abroad considered that their role is over with the listing of depository receipts but now with reverse fungibility, attitudes of the companies will have to change and will have to renew the thrust on investor relations.

Piyush Gupta, regional manager, northern zone, Sebi, said that with reverse fungibility, the markets will now move in alignment and the arbitrage will even out.

"It will also lead to higher foreign exchange inflows and the overseas markets will now become easier to access for the corporates," he added.

The Hong Kong-based Mark Higgin, vice-president, Bank of New York, though was appreciative of the reverse fungibility, he stressed the need for India to have full fungibility in place for the country to be on par with other emerging markets to attract higher foreign investments.

The two-way fungibility guidelines of RBI issued in February 2002 enable a non-resident investor to buy local shares of an Indian company through an Indian stock broker and convert them into American depositary receipts/GDRs eligible to be traded on the international stock exchanges.