Investors in participatory notes will find depository receipts an ‘attractive avenue’

Relaxation of depository receipt rules will open up the Indian stock market to more foreign investors, says a global investment company. US-based BNY Mellon argues that given the bias of global investors toward their home markets, launching over-the-counter, non-capital raising depository receipt programmes is a solution to bring the much-needed foreign capital into the stock market.

Satisfy home bias

BNY Mellon says, depository receipts help satisfy investors’ home bias. It noted that despite the significant international demand for Indian equity, there is an untapped segment of investor demand for Indian equity that cannot be met through the current routes of Qualified Foreign Investors (QFIs), Foreign Institutional Investors (FIIs), Offshore Derivative Instruments (ODIs), Exchange-Traded Funds (ETFs) or mutual funds.

In this regard, a review of public filings in 2012 reveals that nearly half of all global funds investing in India through depository receipts chose not to invest directly through ordinary or local shares. By permitting OTC, non-capital raising depository receipts, India would join 67 other countries that provide investors with access in this way, including Brazil, South Korea, South Africa and Turkey.

BNY Mellon underlined that the establishment of non-capital raising programmes would not involve the issuance of shares. Rather, the depository receipts would only be created upon investor demand when existing ordinary shares are bought in the secondary market and deposited in a depository receipt facility.

The investment manager also suggests that investors in participatory notes will find depository receipts to be an attractive avenue and may reinvest funds parked in P-notes in depository receipts as they become available. This would mean that the investment remains in India.

BNY Mellon recently met with Finance Ministry, SEBI and RBI to push for relaxation of the depository receipt rules. It pointed that 20 years after Reliance Industries established the first-ever depository receipt programme from India, over 330 Indian corporates have adopted a similar approach to raise capital. Of these companies, 13 are listed on the New York Stock Exchange or NASDAQ and 24 are listed on the London Stock Exchange. The remaining corporates have used the Luxembourg Stock Exchange or Singapore Stock Exchange to meet their fund-raising plans.

Globally, there were over 3,500 depository receipt programmes available to investors, representing issuers from 81 countries, as of December 2012. More than 3,300 institutions invest almost $700 billion in depository receipts globally.

Depository receipts are negotiable financial instruments issued by a bank to represent a company's publicly traded securities in a foreign country. They play a key role in cross-border trading and are a preferred instrument for companies listing their shares in global markets and investors seeking international portfolio diversification.

arvind.jayaram@thehindu.co.in

(This article was published on March 14, 2013)
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