Mumbai: Increased volatility in global markets, triggered by lack of consensus on stock valuations, has led to big arbitrage opportunities between the depository receipts of Indian companies listed in foreign markets and their stocks traded on domestic bourses.
A study by Instanex Capital Consultants Ltd, a Mumbai-based specialist on research and trade in depository receipts of Indian companies, indicates that 41 of the 162 dual-listed stocks tracked by the firm offer an average arbitrage—the difference between the prices of the same stock on different exchanges—profit of up to 6%.
“In any volatile market, where trading decisions are faster, speculation is greater, and investors lack rationality, arbitrage opportunities witness a natural rise,” said Gautam Chand, chief executive officer of Instanex.
Depository receipts of many large Indian companies are listed in the US and Europe. Based on where they are listed, the receipts are known as ADRs (American depository receipts) or GDRs (global depository receipts).
According to the report, investors in 29 firms whose depository receipts are cheaper than local shares can have an average return of 1.9% if they buy the depository receipts and sell the shares in India.
Bajaj Hindustan Ltd offers the highest advantage. Buying its GDRs on the Luxembourg Stock Exchange and selling on the Bombay Stock Exchange would fetch returns of 5.43%.
In the reverse case, when the local share is trading lower than its depositary receipt, 12 stocks offer an average return of 1.73% after transaction charges. Tata Motors Ltd’s New York Stock Exchange-listed depository receipts offer the biggest advantage, providing a 4.6% profit opportunity after expenses.
Contrary to recent perception, it is not true that arbitrage opportunities in depository receipts are dropping, insists Shweta Rai, an analyst at Instanex who prepared the report on increased arbitrage opportunities.
Instanex Capital, established in 1993, operates from Mumbai and New York. It is a special situations investment sub-manager to many international funds. The company also runs the Instanex Skindia DR Index, which tracks GDR, ADR prices.
Among liquid GDRs and ADRs in the Skindia DR Index, the highest premium is on Satyam Computer Services Ltd, which offers 18% over the local share prices.
However, the quantum of shares listed by Satyam in foreign markets is relatively low. Therefore, Satyam ADRs always enjoyed a demand-driven premium, said a portfolio fund manager, who did not want to be named.
Tata Communications Ltd’s ADRs, trading at a 4.9% discount to the company’s local share price, as well as Infosys Technologies Ltd’s ADRs at a 5.8% premium and Mahindra and Mahindra Ltd’s GDRs at a 3.75% premium offer attractive arbitrage opportunities for investors with access to depository receipts.