In the beginning, the end — for IDRs

The story of Indian depository receipts (IDRs) seems over in the first chapter itself when shares of its protagonist — Standard Chartered Bank — plunged as much as 20% after the Securities and Exchange Board of India ruled out their conversion into local equity.

The StanChart IDR recovered — barely — to close 17.53% down at Rs94.55.

IDRs are derivative instruments in the sense they are derived from an underlying share elsewhere — much like the global depository receipts (GDRs) and American depositary receipts (ADRs) of Indian companies.

IDRs help foreign companies raise money for their activities in India.

The StanChart IDR tanked because institutional investors, who were hoping to convert their holdings, dumped.

Credit Suisse Singapore sold 55.49 lakh IDRs at an average price of Rs95.50, Deutsche Securities Mauritius sold 13 lakh shares at Rs96.32, Swiss Finance Corporation sold 115.51 lakh shares at around Rs95.50 on Monday.

As of March 31, 2011, institutional investors and mutual funds were the major holders owning 69.86% and 10.12% of the total 24 crore IDRs, respectively.

Clearly, a lot of institutions continue to hold the stock or are unable to sell.

Every 10 IDRs represent one share of Standard Chartered Plc, which is listed on the London Stock Exchange.

“The selling was related to the fungibility issue. Unless you are allowed to convert, such securities will tend to trade at a discount because the rights on them are not the same as a normal share. Their pricing would be on same lines like DVRs (differential voting rights) which trade at significant discount to the underlying equity shares,” said Sandip Sabharwal, CEO of portfolio management services at Prabhudas Lilladher.

The frenetic unloading showed: total IDRs traded on the Bombay Stock Exchange was 182.66 lakh on Monday as against a two-week average of 1.15 lakh.

“Many institutions and high networth clients who had subscribed to the issue last year were hoping to convert. This was reflected in the minuscule price differential between the IDRs and the underlying listed shares in the United Kingdom,” said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities.

Prior to Monday’s event, the IDRs had been trading at an average discount of 5% since last five months or so.

Post the Monday’s fall, the discount has widened to 22%.

The Sebi on Friday said conversion of IDRs into underlying equity shares will be allowed one year after their listing only if they are traded infrequently or the annualised trading turnover during the six months preceding the month of redemption is less than 5% of the total securities issued.

In StanChart’s case, the volumes were as high as 48%, and the due date for its conversion was June 11.

The regulator had argued that allowing redemption freely would result in reduction of number of listed IDRs thereby impacting the liquidty.

Experts fear that these set of regulations may jeopardise the listing of IDRs by prospective foreign companies.   

“Under these norms, there is a liquidity disincentive as conversion won’t be allowed if the IDRs are liquid. As a result, global  companies could shy away from issuing IDRs in India. So the StanChart IDR may well be the first and last IDR issue from India,” said Thunuguntla.

As such the IDRs were not treated on a par - called pari passu in Street lingo — with equity shares in India, which had kept many of investors away.

Insurance companies are also not allowed to invest in IDRs.

Plus there is a tax issue. “But the issues related to tax treatment have been there and known before by investors,” said Sabharwal.