The ministry of finance (MoF)at the centre appears divided over the issue of permitting Infosys Technologies Ltd to go ahead with its proposed American Depository Receipts (ADR) issue. The company has sought MoF's permission to issue $275 million of ADRs.
According to sources, what is bothering some sections in the ministry is the issue of two-way fungibility.
In its application made in December 1997, Infosys has sought the government permission to convert part of existing domestic holdings of FII/NRI/OCB holdings under the 30 per cent portfolio limit to ADRs upto $100 million.
The current Indian laws do not allow this kind of conversion. A company can issue GDRs which at the investor's will can be converted into shares.
And the investor can also ask for cancellation of GDR, convert it into shares, sell the shares and repatriate the money in foreign currency. Thus, while a GDR can be converted into shares, the reverse fungibility is yet not allowed.
Some MoF officials feel that such a decision can only be taken at the policy level, and can not be specific to a company. Moreover, the two-way fungibility, if allowed at the policy level, will integrate the domestic market with the ADR market, thereby running the risk of importing volatility.
There also appears to be a divided opinion on the issue of stock option in ADR. Infosys has asked permission for fresh issue of stock option upto $50 million leading to issue of ADRs over a period of 7 to 10 years. The company has justified this proposal on the basis of its need to attract talent for its global operations.
The MoF sources pointed out that while stock options for Indian employees in terms of domestic shares are fine, such options in terms of ADR will create a special class of investors, which may not be desirable. Besides, this too is a policy issue, they added.
Further, the size of the ADR asked for by Infosys is much higher than can be justified by the level of the company's operations, according to an opinion.
The company had a gross turnover of Rs 260 crore and a paid up capital of Rs 16 crore in 1997-98. As against this, the company has asked for an ADR issue of $275 million or approximately Rs 1100 crore, which seems too large, said the sources.
Moreover, allowing FIIs to convert their holdings into ADR will obfuscate the difference between portfolio investment and foreign direct investment. Currently, FII investment is treated as portfolio investment while the GDR issues are considered foreign direct investment.
However, there is also a contrarian view in the ministry. A section of officials feel that an integration between GDR/ADR and domestic market is beneficial to the investor, as two markets for the same instrument builds up price differentials which are arbitrary.
