Mumbai: Standard Chartered Plc’s Indian depository receipts (IDRs) crashed as much as 20% on Monday as investors couldn’t get rid of them fast enough after the Securities and Exchange Board of India, or Sebi, said they can’t be converted into shares, dashing the expectations of holders.
The regulator’s 3 June notification has rendered the IDR an unpopular instrument, given that investors won’t be too excited about buying Indian paper that can’t be converted into shares in an overseas company that would give them voting rights, analysts said. StanChart is the only company with IDRs.
At the end of trade, the IDRs recovered slightly from the day’s low to Rs 94.55 on the Bombay Stock Exchange, down 17.53%, after falling to an intraday low of Rs 91.75. The exchange’s benchmark equity index, the Sensex, gained 0.24% to close at 18,420.11 points.
On the London Stock Exchange, the bank’s stock was trading at £15.90, up 0.25%, at the time of filing the story.
IDRs are securities that represent an ownership interest in a fixed number of underlying equity shares of the issuing company.
StanChart is the first and only overseas firm to have listed its IDRs in India. It sold 240 million IDRs last May at Rs 104 apiece. One StanChart share is equal to 10 IDRs.
The IDRs, listed on 11 June 2010 at Rs 105, hit a peak of Rs 134.5 in March.
Some investors had bought the IDRs expecting to convert them into shares after a one-year lock-in that was supposed to end on 11 June.
But the Sebi notification stipulated that a conversion into shares would be possible only if the trading volume over the last six months was less than 5% of the total IDRs issued. The volume of trade on the StanChart IDR reached its lifetime high of 18.2 million on Monday against an average of 0.34 million daily since its June 2010 listing.
An SMC Global Securities research note on Monday said the annualized turnover over the period of the previous six calendar months worked out to 48.65% of the total number of IDRs issued.
Since the IDR would be considered “liquid...convertibility is not permitted”, the report said.
At the time of the initial public offering, several high networth individuals and institutions had purchased the IDRs hoping they would be able to convert them into shares, SMC said.
“However, with this regulation, it is clear that such conversion is not possible,” the report said. “Hence, the IDR holders will remain IDR holders. They will not be entitled to voting rights.”
Current Sebi and Reserve Bank of India (RBI) regulations don’t allow automatic fungibility of IDRs.
At the time of issuing the IDRs, the bank told investors that conversion into shares would be permitted only after a year on a case-by-case basis, provided there was RBI approval.
Sebi’s clarification makes it clear that this will only be allowed if the receipts are traded infrequently.
StanChart did not issue any statement on the Sebi norms or the sharp fall in its IDRs.
Jaspal Singh Bindra, StanChart’s group executive director and chief executive officer, Asia, told CNBC-TV18 that clarity on regulations would have been welcome.
“We couldn’t have the insurance sector participate, which is the case even today. We didn’t have this classified as securities for tax purposes, which remains an issue. The fungibility was uncertain even then and now,” he said.
“We are living through the experience of experimenting with a new instrument. As these things will evolve, it’s as much a learning for the investor base as it is for ourselves, the issuer,” he added.
Ajay Parmar, head of research at Emkay Global Financial Services Ltd, said more IDR issues were unlikely.
“In future, nobody (companies) will come. Sebi was also worried that if all investors convert then there will be no IDRs. It will also be factored in the price,” he said.
A fund manager with a large public sector-sponsored mutual fund said investors will adjust the value of the StanChart IDR at a discount to its share price.
Another fund manager with a private mutual fund welcomed the Sebi move, saying it would help in negating the arbitrage opportunity between IDRs and the actual shares trading abroad.
“Retail investors can anyway sell the IDRs when they want, but if some large investor wants to convert into a share to take advantage of the arbitrage, it’s not Sebi’s problem,” he said.
In its note, SMC also said overseas companies may not be too keen on IDRs.
“If that is the case, the StanChart IDR issue may be the first as well as the last IDR issue from India. The hope of IDR market may fizzle out, even before it took off,” SMC said, adding that StanChart’s IDR “probably has become the victim of experimentation”.