HDFC Bank ADR premium surges to over 10% as foreigners favour US shares

HDFC Bank's ADRs now trade over 10% above local shares as tax advantages and revived global interest draw foreign portfolio investors to US-listed equities

The premium on HDFC Bank’s American Depositary Receipts (ADRs) has surged to over 10 per cent after failing to rise above 5 per cent last year, signalling renewed interest from foreign investors in India’s most-valued lender. 

 

But, why are overseas investors opting for ADRs despite local shares trading 12 per cent cheaper? The answer lies in tax disparities between the United States (US) and India.  

 

A recent Macquarie note explains: “For foreign portfolio investors (FPIs), buying liquid ADRs is more tax-efficient than local shares. India’s 2024 Budget raised long-term and short-term capital gains taxes, with potential for further hikes. Non-US investors in ADRs may avoid capital gains tax in the US, whereas buying local shares attracts a 20 per cent short-term and 12.5 per cent long-term capital gains tax in India — justifying the ADR premium.” In early 2021, HDFC Bank’s ADR premium had exceeded 30 per cent, partly due to limited investment room for FPIs in domestic market. However, the HDFC Bank-HDFC merger and record FPI outflows in 2023 freed up substantial room for foreign investors. By early 2024, ADRs even traded at a discount to local shares before the recent rebound.