Mumbai: Standard Chartered Plc’s first-of-its kind Indian depository receipt (IDR) issue has closed. After a tepid response on the first two days, the IDR issue has been subscribed 2.2 times. The institutional portion has been subscribed four times, but the response from retail investors was lacklustre.
A. Rajagopal, managing director and head of global capital markets at Swiss financial services firm UBS AG’s Indian arm, said in an interview that he is confident it will open the way for more such issues. Edited excerpts:
The institutional portion of the StanChart IDR has been subscribed four times. Can you share some details about the quality of participation?
As you are aware, IDRs are open to all classes of institutional investors except Indian insurance companies, to a degree. So we had subscriptions from domestic mutual funds, FIIs (foreign institutional investors) as well as domestic banks and institutions. As we also saw in the anchor book, it was all domestic mutual funds who were, obviously, very high quality. So many of them plus many more mutual funds participated. We had a few FIIs also participating and then banks as well.
Given the fact that insurance companies are not allowed to invest in IDRs, are you surprised by the response to your book of qualified institutional buyers, particularly as the market conditions have been so volatile?
Not really, I think...we all understand that the market conditions have been particularly volatile. But we need to bear in mind a couple of factors, and certainly from the domestic institutional community, this is really the first opportunity that they have got in investing in any global company of this quality.
IDRs are extremely similar in terms of investment to equity shares in the sense they are denominated in rupees, they list and trade in the stock exchanges like equity shares. So to that extent the ease with which they can participate in a global company has been substantially improved because of the IDR. So domestic institutional investors participating is not at all a surprise.
As far as foreign institutional investors are concerned, you need to understand that Standard Chartered is a globally listed bank with a wide ownership. It’s a world-class bank, many of them are actually very familiar and this is another line of stock that they can own through the IDR.
So clearly we are not surprised by the overwhelming response that we got on the institutional segment.
Finally, one should also not forget that there is a clear argument even on valuation for Standard Chartered Bank; if you look at on a historical basis itself, it is valued at somewhat lesser than, say, comparable Indian banks. When I say comparable, (it is) comparable in terms of growth, in terms of RoE (return on equity)... So overall it’s a very compelling investment proposition.
Institutional investors have been made to pay 100% margin upfront from 1 May for all public issues. Secondly, the IDRs attract both dividend distribution tax and capital gains tax. Will these two factors act as a deterrent for investors?
Let me handle the second part first. The whole question about taxation is clearly different, let me admit that. However, this has not been pitched as an instrument where just because of tax arbitrage it becomes attractive. It was clearly on a very fundamental basis on the points which I talked about Standard Chartered Bank and its attractiveness that this was sold.
As far as the 100% margin is concerned, yes, this is the first transaction which is going on that basis. Clearly, that would have an impact on two accounts. One is the earliness with which institutional investors will come in now. Going forward, they have much lesser of an incentive to come on any day except the last day.
Secondly, obviously because there is a 100% margin, the bidding will be exactly what they are looking to get because otherwise we are unnecessarily blocking your money and the full 100%, unlike earlier when it was only 10%.
So, yes, going forward I would say that all transactions would have to live with that framework.
This is a test case for global companies to take the IDR route. Do you see a lot more MNCs (multinational companies) opting for IDRs and investors also pitching in?
I would certainly hope so, considering the amount of effort it has taken to get the first IDR from everybody, not just from Standard Chartered Bank but the regulators, the investment bankers, the stock exchanges, everyone involved in this.
I genuinely hope the success of this transaction would make it more (attractive) for at least more international companies, especially MNCs who have a significant presence in India, in different ways to consider an IDR, I sincerely hope so.