Encourage GDRs, not FIIs

Section 41 of the Companies Bill, 2011 seeks to permit Indian companies to raise equity, after passing a special resolution, from abroad through issuance of Global Depository Receipts (GDRs). This via media enables them to tide over the difficulty in offering equity, denominated as they are in Indian rupees, straightaway to foreigners who are basically interested in trading in foreign bourses.

This isn't a novel measure. Already, the GDR route to resource mobilisation is open, operated through guidelines issued for the purpose by the Department of Economic Affairs, Ministry of Finance, which also requires passing of a special resolution by the company. The minutiae of the foreign issues under the new dispensation would presumably be similar to the present one, thus making for a transition sans unsettling changes.

TRAIL OF DESTRUCTION

The debate on the greater desirability of GDR vis-à-vis FII is as old as the hills, but needs reiteration and recapitulation, given the recent stance of the government in giving a leg-up to another species of FII, namely, foreign individual investors.

The FII dispensation has been attracting flak not only for its opaqueness — especially in operating its subset, namely the Participatory Notes mechanism, that lends itself to anyone and everyone clambering onto the FII bandwagon — but also for the destructive impact of its intermittent pullouts from India on both the stock market and currency market.

When the stock market is ravaged by the formidable FIIs, its echo is immediately heard in the currency market as well. The so-called disciplining and chastening effects of FII investment on our corporates seem to be vastly exaggerated; it was the distant ADR (American version of GDRs) investors in New York, in Satyam Computers' shares, who blew the lid off the scandal to ratchet up its profits by cooking up the books of accounts by its promoters.

ILLUSORY IMPROVEMENT

Improvements in our forex position due to FII investments have proved to be evanescent and illusory, indeed dangerous, given their disarming potential, as has been the case with mindless external commercial borrowings. In the event, one wonders what benefits are going to accrue to the nation through further liberalisation of the FII route.

Are individuals going to show greater commitment than institutions? Well, one cannot help being cynical. That the Depository Participants have been mandated to take care of Know Your Customer (KYC) norms is, at best, a cold comfort.

GDR and its American equivalent ADR, on the other hand, come out smelling of roses though, admittedly, given the present global financial conditions, no Indian company has the courage to approach foreign bourses for resource mobilisation. But, by that token, it is unwise to expect foreign individuals to make a beeline to Indian bourses as well in the present juncture.

ADVANTAGE GDR

Thus, if one steps out of the immediate present and looks beyond, the GDR-FII debate must lead to the inevitable conclusion that the government must encourage GDRs more than FII. A company making a successful GDR issue abroad can wear it on its sleeve, as being endorsement of the company by finicky foreign investors and foreign merchant bankers, who usually don't condescend to patronise shares emanating from lesser nations.

It is not as if they are throwing doles at us because a company making a GDR issue, especially in the aftermath of the chastening Satyam episode, must be alive to the sensitivities and financial shrewdness of the foreign investors who have the liberty to either trade in GDR in the foreign bourse in which it is listed, in foreign currency, or in the Indian bourses in Indian rupees after converting them into underlying shares.

GDR is nothing but equity denominated in a hard currency to facilitate its listing and trading abroad. Its holder doesn't get voting rights unless he converts it into underlying shares. The foreigners are wooed with the prospect of cashing in on the arbitrage opportunities — sell abroad or in India, depending upon which course begets more foreign currency at the end of the day.

REGULATE ENTRY, EXIT

GDR is permanent; it beefs up the capital of a company. FII, on the contrary, doesn't fortify the capital of the company; instead, it adds to the volatility of the share market. Indian promoters, fearing intrusive foreign collaborators, should make a pitch for GDR, given the fact that the amorphous lot of foreign retail investors settle for a less-than-hands-on role vis-à-vis the foreign collaborators in the day-to-day affairs of the company.

Foreign individual investors thus need to be initially welcomed to India, not into its secondary market but into the primary one. And once they have left their imprint on the Indian companies, they must be allowed the liberty to operate in the Indian bourses, as indeed is the case at present with regard to GDR/ADR investments.

In other words, the exit opportunity offered by the Indian bourses should be made available only to those foreigners who have, in the first place, availed of the entry opportunity offered by GDRs/ADRs. What we are doing at present is giving a free run to FIIs to enter and exit at will, untrammelled by any restrictions.

(The author is a New Delhi-based chartered accountant.)

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