Joining global capital markets

Depository receipts can add value

Indian depository receipts (IDR) are set to get going after a long gestation period of six years with Standard Chartered Bank filing a red herring prospectus to raise up to $750 million. It took this long because the stringent Indian regulations made it possible only for large global companies to come. This, along with the tough disclosure and corporate governance norms stipulated made it easier and cheaper for medium-sized companies to list in Luxemburg, or the Alternative Investment Market in London or Dubai. Some initial rules have been eased for members of the International Organisation of Securities Commissions who have signed the multilateral memorandum, thus requiring an issuer company to follow only its own country regulations. But even now, there are things you cannot do with IDRs which you can do with say ADRs, their American counterparts, like free fungibility between ADRs and the underlying shares to seek an arbitrage opportunity. Also, IDRs do not have the same capital gains tax advantage that ordinary Indian shares do, although IDR holders have the same rights as ordinary shareholders of the foreign company.

IDRs are seen as part of the internationalisation of securities markets which opens up markets to foreign investors and removes restrictions on citizens keen on investing abroad. The tough Indian regulations were initially seen as a roadblock in the way of India emerging as a regional financial centre. But the global financial crisis has changed perspectives, and regulatory conservatism is now seen as a good thing. Some of the shine of a financial hub has rubbed off. Among other negatives, financial hubs create a class of very highly-paid managers which upsets the incentives balance within a society, making even good science graduates opt for a career in financial engineering rather than in R&D. Besides, the IDR issuer takes out of the country the entire issue proceeds, causing some to argue that, given India’s need for investment, incentives should favour savings being deployed here. But this argument no longer holds, what with a Bharti or a Tata Motors making large acquisitions overseas.

It is not as if, on the balance, IDRs are not a good thing. The decision of Standard Chartered indicates the enormous attractiveness of the Indian market and its future. IDRs also give Indian investors a chance to invest in well-known global companies with no more hassles than in picking up pure Indian paper. Further, an IDR issue by an MNC with a large presence in India can not only bring to India the disclosure levels of well-regulated markets but also help us know more about what the company is doing in India. In fact, the government should make IDRs attractive for issuers without relaxing disclosure requirements. One way is not to make it obligatory for outward remittance of the issue proceeds. This helps the company to fund its Indian investment from Indian resources; derive any arbitrage benefit that may be possible between the cost of Indian and foreign funds, and save the cost of converting from rupee to foreign currency to rupee again. The gain for India is better disclosure by MNCs which have a large presence here but don’t really care as they are not listed here.