Mumbai: The country’s most-tracked equity index, the Sensex, dropped to a 40-month low of 8,160.40 in early March. In the next three months, by the end of May, the benchmark index rose 79.22% and many stocks even more as investors’ risk appetite rose on fledgling signs of economic recovery in certain pockets.
Between 9 March and the end of May, when the Sensex rose 79.22%, 22 of the 24 ADRs/GDRs outperformed their local counterparts. Ahmed Raza Khan / Mint
Shares of Indian companies listed on overseas exchanges have fared even better than those traded on local exchanges.
A Mint analysis of American depository receipts (ADRs) and global depository receipts (GDRs), the names by which Indian shares listed on American stock exchanges and other global exchanges, respectively, are known, shows that ADRs and GDRs have far outperformed their counterparts listed in India.
When an Indian company wants to list its shares abroad, it deposits its shares with a bank located in the country where it wants to list.
The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying. These receipts are then sold to investors and listed on the stock exchanges. Their prices fluctuate depending on their demand and supply, and on the fundamentals of the underlying company.
Out of 4,700 locally listed Indian firms, 133 are traded overseas but this analysis is restricted to the 24 of the National Stock Exchange’s benchmark index Nifty stocks. Nifty is a basket of 50 stocks but all of them are not listed overseas.
Between 9 March and the end of May, when the Sensex rose 79.22%, 22 of the 24 ADRs/GDRs outperformed their local counterparts. For instance, ADRs of Tata Motors Ltd, listed on the New York Stock Exchange, gained 201.56%, while the shares of the company listed on the Bombay Stock Exchange (BSE) gained 146.31%.
Similarly, GDRs of Reliance Capital Ltd, listed on the Luxembourg Stock Exchange, gained 273.62% but its shares listed on BSE gained 235.46%.
Only Hindalco Industries Ltd and Reliance Infrastructure Ltd saw their domestic shares outperform overseas counterparts during that period.
That said, during the market fall that began in early January 2008 and continued till March 2009, ADR/GDR prices of the same 24 companies fell sharper than their counterparts listed in India.
“ADRs/GDRs are usually bought by people who cannot invest directly in the Indian market. As institutions and individuals overseas were in the grip of the credit crisis till very recently, it’s only natural that ADRs/GDRs got sold more aggressively,” said Amitabh Chakraborty, president of equity at Religare Securities Ltd, pointing to the fact that overseas investors were worse off over that period than the more insulated domestic investors.
Chakraborty has an explanation for the larger rise of ADRs/GDRs compared to their domestic counterparts since March.
During the bear phase, an ADR at $1 could have fallen to 10 cents, which is a 90% fall. The equivalent of that in local stocks, say, is Rs45, and if that had fallen to Rs10, then it’s only a 77% fall. When the markets picked up, if the ADR rose from 10 cents to, say, 30 cents, that’s a 200% rise. At the same time, since the fall has been relatively lower for the local shares, the rise may also be relatively lower. If the local shares rose to Rs25 a share from Rs10, then it’s only a 150% rise, opposed to the ADR’s 200% gain.
If one analyses the previous peaks and troughs in the market, there doesn’t seem to be any definite pattern of ADR/GDRs falling and rising much faster than their local counterparts always.
For instance, between 15 June 2006 and 8 January 2008, when the Sensex gained 118.68%, 18 of the Nifty companies that had ADRs/GDRs then saw their ADRs/GDRs gain more than the local shares, with only two companies—Infosys Technologies Ltd and ICICI Bank Ltd—seeing local shares with larger gains than their respective ADRs/GDRs.
But from peak to trough between 11 May 2006 and 14 June 2006, when the Sensex declined 28.19%, 10 ADRs/GDRs lost more than their local shares, while the other 10 lost less.
Similarly, in the preceding trough to peak, from 18 May 2004 to 10 May 2006, when the Sensex gained 158.61%, there were more companies whose local shares gained more than their ADR/GDRs. There were 13 companies in this latter group versus four whose shares listed overseas gained more than the locally listed shares.