Standard Chartered need not convert IDRs into shares: SEBI

Standard Chartered IDR Price Crash 6/6/2011

The Standard Chartered IDR open on a lower circuit of 20% today at 91.75 on the Bombay Stock Exchange and is trading now at 100 on value buying.

The UK’s Standard Chartered Bank, which was the first foreign lender to come out with Indian depository receipts, will not be required to convert their IDRs into shares as per the guidelines issued by Sebi. After the announcement of guidelines by the Securities and Exchange Board of India (Sebi) on Friday, the company, whose IDRs are frequently traded on Indian stock markets, need not convert them into underlying shares after one year of getting listed.

"After the completion of one year from the date of issuance of IDRs, redemption of the IDRs shall be permitted only if the IDRs are infrequently traded on the stock exchange(s) in India," Sebi said while clarifying the position with regard to StanChart IDRs. An IDR represents ownership in shares of a foreign firm, which trades in domestic capital market. An IDR is bought and sold just like a regular stock.

StanChart is the only foreign company to have issued IDRs to the Indian shareholders. Ten StanChart IDRs represent one underlying equity of the UK-listed bank. The StanChart IDRs were due to come up for redemption on June 11, 2011. The Sebi norms said that if the annual trading turnover in IDRs in the preceding six calendar months before redemption is less than 5%, then only the company could go into for redemption of IDRs.

Though the market it taking the SEBi directive as negative one may still benefit in the long run holding the IDRs itself.

-Inputs frm ET


Jun 06, 2011 02:12 pm

By Ruma Dubey, Source: Fwd Email

All those who stayed away from Stanchart IDR would be having a smug, “I told you so!” expression on their face. The uncertainty and grey areas were too many and being a first-timer, retail investors really did not want to take a chance. But FIIs, who had kept away initially were eventually lured in by the arbitrage advantage. That explains the stock holding where FIIs currently hold over 70% while retail investors hold less than 8%. Interestingly, Azim Premji held 3.07% stake and Madras Aluminium held 1.54%.

The IDR, which was issued a year ago at a price of Rs.104 per IDR hit a new 52-week low today at Rs.91.75, hitting the 20% lower circuit. More than double number of sellers than buyers remained on the counter.

SEBI tweaked the basic norms at the last minute and this has caused immense heart burn. Obviously, if the basic premise of making the investment itself is changed, surely there will be an exodus. But on reading the fine print, it becomes clear that it is not something which SEBI suddenly pulled out of the hat; this was not exactly expected but not ruled out too.

The IDR hit the bottom after SEBI issued a framework for investors to redeem the IDRs into underlying equity shares if they become illiquid. As per the new norm now, Stanchart UK will not be required to convert these IDRs into shares. The rule, when the IDR was issued, had stated that after completion of a year from the date of issuance of IDRs, which falls due on 11th June 2011, the IDRs were to be converted into share. When the IDR was launched, at that time itself, it was clear that convertibility would be an issue which was subject to regulatory decision and now SEBI has taken than decision.

This disallowance of convertibility, as we understand now, is based on the volume or liquidity of the IDR. SEBI has stated that redemption of IDRs will be permitted only if its annualized trading volume was less than 5% of the total IDRs issued. And that is surely not the case here. The annualized trading volume in Stanchart IDRs over the last six months was 48.5% of the total IDRs. And as there is obviously enough liquidity, SEBI has ruled that it need not be converted.

Well, SEBI has ruled what it thought was just but the underlying question is – should products which are mired in a lot of uncertainty be invested in? For every first timer, every step is a new step, a trial and error. So being a new product, the risk of that novelty does remain. But if do not take a risk and do not get products going, that would be a bigger blotch. The equity markets would not have evolved if that first step was not taken. And the markets are still evolving, the trial and error continues.

Ditto is the case for Stanchart IDR. Unless and until more such IDRs hit the market, SEBI might not exactly be forced to remove all the doubts surrounding such IDRs. The confusion over the tax angle and that on two-way fungibility remains. The two way fungibility means that the IDRs can be converted into underlying shares & underlying shares can be converted into IDRs. But as per the norms now, automatic fungibility is not permitted and neither is two-way. In case of Stanchart IDR, what this means is that investors cannot purchase existing shares on the London Stock Exchange and/or the Hong Kong Stock Exchange and deposit them into the IDR programme. And as this two-way fungibility is not allowed, if SEBI had allowed redemption, the fear was that liquidity could have been impacted. But this ban on two-way fungibility has made it less attractive to the FIIs.

Well, it’s a new product and this is probably the stage of experimentation. Unfortunately it is at the cost of investors but fortunately, not at the cost of retail investors who have been smart enough to stay away from the unknown.

This move by SEBI is a big blow to the IDR market and unless all the grey areas are cleared, this product does not seem to have too much going for it in India.

Food for thought: A terrific investment can become an even more terrific arbitrage but can a purely arbitrage investment ever become value investment?

Standard Chartered IDR, Standard Chartered stock price crash, VRIDHI, Financial Planners Chennai, Financial Planning Chennai

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