When Standard Chartered Plc decided to list itself in India a year ago through a Indian Depository Receipt (IDR) issue it attracted much attention. That a company of StanChart's pedigree could seek local listing was seen as proof that the Indian capital market, with its large pool of investors, was becoming a big draw for global companies. However, a year hence, no other global company has taken the IDR route to list on the Indian bourses. And subscribers to the StanChart IDR are discovering the many regulatory pitfalls to investing in IDRs. The latest came last week when SEBI decreed that the IDRs could be redeemed into underlying shares only if they were infrequently traded in the Indian market. Infrequently traded is defined as when less than five per cent of the listed IDRs are transacted in six months. With the IDRs being actively traded, what this means is that holders can no longer look forward to arbitrage profits, from a narrowing of the gap between the price of the Indian IDR and the underlying shares in the UK or Hong Kong markets. Since listing, the Indian IDR has always traded at a discount to the shares abroad, with the discount swinging between a modest 2 per cent and a very significant 14 per cent.
Free two-way fungibility of IDRs, which would have allowed traders to arbitrage on the difference between the value of the IDR here and that of the underlying shares overseas, was forbidden from the outset by the Reserve Bank of India. Investors in StanChart's IDR were told at the time of the offer that the option of redeeming IDRs into underlying shares would be permitted on a “case-to-case” basis after a one-year lock in period that was to end this week. SEBI's clarification in effect moves the goal post well after the game has begun. Closure of the arbitrage window between markets will greatly impede price discovery. Not surprising then that the StanChart IDR fell by as much as 19 per cent within minutes of the market opening on Monday.
Indeed, this is not the only regulatory aspect which makes IDRs distinctly unfriendly to investors. From the time of the StanChart offer, clarity has been lacking on vital aspects such as the tax treatment of capital gains on the instrument and the eligibility of institutional investors (such as insurance companies) to buy them. Indian IDR holders were also denied the opportunity to participate in StanChart's recent rights offer as there was lack of clarity on the offer procedure. Unless the regulators clarify these issues and put together a comprehensive framework for IDRs, StanChart may remain the only global company to have used the IDR route to list in India.