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Ambarish Mukherjee

New Delhi , Dec. 3

WHILE the Government is yet to allow two-way convertibility of shares, Indian investors with close relatives abroad could well use the `gift route' to take advantage of the price differential between the Indian shares and its corresponding ADRs/GDRs.

Thus an investor in India can buy the shares in the Indian market and gift it to his close relative (as defined by Indian laws) who is an NRI. This relative can in turn sell these shares in the US market where it commands a huge premium over the Indian price. This money can be routed back to the original Indian investor through the normal inward remittance channel. The only hitch is that each of these applications for conversion has to be approved by the Foreign Investment Promotion Board. .

While the continued bull run over the past few months have seen prices of Indian blue-chips move up sharply, the corresponding increase in their respective ADRs has been almost double or more than the movement in domestic bourses in most cases. Consequently, the difference between their Indian prices and corresponding ADR prices has only widened.

A close look at a sample set of ADRs shows that the difference between Indian prices and their corresponding ADRs are increasing across-the-board with the sole exception of Infosys. This, coupled up with the Government's decision to permit transfer of Indian equity to non-resident Indians by way of gifts on non-repatriation basis to close relatives with an annual limit of Rs 10 lakh per company, could offer arbitrage opportunities for a smart investor. The decision to allow such gifting was taken by an internal-departmental group constituted by the Department of Economic Affairs (DEA) in 2002.

For example, in case of HDFC Bank, the price differential in August between the ADR and an Indian share was Rs 732. By November-end, this had gone up to Rs 898.73. In the case of ICICI Bank, the difference was Rs 264.59 in August, which went up to Rs 360.9 while in Satyam Computers the difference had gone up from Rs 318.67 in August this year to Rs 633.97 in November. In case of Wipro, the difference had increased from Rs 125.54 in August to Rs 237.63 in November.

However, Infosys was an exception where the price differential was narrowing down. In August, the Indian share was Rs 1,321.57 more than its US price and was reduced to Rs 1,110.63 by November-end.

"The very fact that there are people abroad to buy these shares at such high prices reflects that these companies are still undervalued in the Indian market. Moreover, since the difference is increasing it seems that the foreign institutional valuation of these companies are very different from what Indian markets are estimating them to be. This could translate in the FIIs getting more active in counters that are listed abroad," said a leading NSE broker who operates in all the market segments.

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