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Regulatory shock for IDR holders

Tania Kishore Jaleel  |  Mumbai 

The Securities and Exchange Board of India (Sebi) has queered the pitch for investors wanting to invest in Indian Depository Receipts or IDRs of foreign companies. In a move that could reduce their interest in these issues, the market regulator has barred conversion of IDRs to shares of the foreign company. Investors, as a consequence, can exit only by selling at exchanges where the foreign company is listed.

At present, the only listed IDR in the market is Standard Chartered Plc’s, which is listed on the Bombay Stock Exchange and the National Stock Exchange. With only a week to go before the issue completes one year, the market regulator’s guideline has caused panic among investors.

Yesterday, the IDR fell 17.53 per cent to close at Rs 94.37, lower than the issue price of Rs 104. Today, it closed up Rs 98.10, up 3.75 per cent because of some institutional buying by Goldman Sachs Investments, Mauritius, and day trading by Credit Suisse, Singapore.

While most investors in the IDR are institutional, around 15-20 per cent of the participants are retail and high net worth individuals. Standard Chartered had issued 240 million IDRs. As per the number of applications, 40,604 retail investors had applied for 17 million, 698 HNIs had applied for 79 million, 116 institutional players applied for 340 million and 1,953 employees had applied for 934,400 IDRs.

Sebi has announced that IDR holders will not get the option to convert them into shares after one year of holding and redemption will only be allowed if the IDR is illiquid. That means if the annualised trading turnover during the six calendar months immediately preceding the month of redemption is less than five per cent of the listed IDRs, they will be allowed to be redeemed. The issuing company will have to check the frequency of trading on a half-yearly basis, ending in June and December each year.

The annualised trading volume in Standard Chartered’s IDRs over the last six months was 48.5 per cent of the total IDR issue. So, there will be no redemption. Sebi’s move has hurt investors, as they lost an arbitrage opportunity of converting the IDR into underlying shares and selling it in global markets.

This announcement is not in the interest of future IDR issuances. Some even say foreign companies would find it difficult to attract investors because of the limited exit route. In fact, some are advising that one should book losses because as the date for completing one year comes closer, there could be more sell-offs by institutions.

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First Published: Wed, June 08 2011. 00:43 IST