For Standard Chartered Plc, the Indian depository receipt (IDR) issue that will hit the market on 25 May is a sort of homecoming. Group chief executive Peter Sands has described the listing as “coming back to our roots”. Standard Chartered opened its first Indian branch in Kolkata (then Calcutta) in April 1858, a year after the so-called first war of independence in which sepoys of the British East India Company’s army rebelled against the rulers. It is the second oldest foreign bank in India after Hongkong and Shanghai Banking Corp. Ltd (HSBC). With around Rs1 trillion of assets, Standard Chartered has 94 branches in India—the biggest network run by a foreign bank in India—spread over 37 centres with around two million retail customers and at least 1,500 corporate and institutional relationships.
India is the second biggest profit centre for Standard Chartered after Hong Kong. In 2009, it derived 12% of its income from India, which contributed $1.06 billion (around Rs4,780 crore) of its $7.23 billion operating profit.
IDRs are not very different from global depository receipts and American depository shares that Indian firms sell in London and New York. They are derivative instruments with shares as the underlying asset. The rupee-denominated IDRs allow foreign companies to raise money in India. Any firm with a paid-up capital and free reserves of $50 million and average market capitalization of $100 million in its home market can get IDRs listed in India. Standard Chartered will be the first to do so.
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Who can invest in IDRs? A minimum 50% of the issue is reserved for qualified institutional buyers (QIBs) while 30% is meant for retail investors. The remaining 20% can be distributed among non-institutional investors, including high networth individuals, corporations as well as non-resident Indians and employees of the bank. In case there aren’t too many takers for the IDR issue among retail and non-institutional investors, QIBs can buy more than the 50% reserved for them. Insurance companies and venture capital funds are not allowed to invest in IDRs.
Standard Chartered is already listed in London and Hong Kong, and after India, it will list in Shanghai. Theoretically, this is an opportunity for Indian investors to own stock in a foreign entity listed on Indian bourses. They can buy the shares using local currency. The floor for retail investment is Rs20,000 and the maximum one can invest is Rs1 lakh. Even now a retail investor can buy stocks of foreign firms up to $200,000, but the process is not simple. For instance, the investor needs to have a bank account outside India to hold foreign currency and demat accounts outside India to hold foreign securities.
Since every 10 Standard Chartered IDRs will represent one share of the bank and they will be priced at a discount to the price at which the bank’s stock is trading on the London Stock Exchange, analysts expect the IDR to be priced at around Rs110. According to one report, based on 2009 results, the Standard Chartered share has a price-to-book value of 2, compared with 2.5 for State Bank of India, or SBI, and on the price-to-earnings metric, it is trading at 14.6 times compared with 15.7 for SBI and 29.4 for HDFC Bank Ltd.
This may encourage many investors to buy Standard Chartered IDRs. As the bank derives at least 90% of its income from emerging markets in Asia and Africa, the issue will offer exposure to the Asian banking sector, which has done much better than banks in the US and Europe after the 2008 global financial crisis. SBI, Punjab National Bank, ICICI Bank Ltd, HDFC Bank, Axis Bank Ltd and other listed Indian banks represent the banking story in India, the world’s second fastest growing major economy.
A recent report by HDFC Securities Ltd has suggested that if the Indian operations of foreign banks were listed, their consolidated market capitalization would be in the range of $28-32 billion, around one-fourth that of local banks. The top three foreign banks, Citibank NA, HSBC and Standard Chartered, would account for around 80% of the total market capitalization. Foreign banks in India, according to the report, can trade at a higher price than public sector banks and domestic private banks because they are far more profitable. They account for around 6% of total business and 0.4% of the total branch network, but 14% of total profits. The key driver of their profitability is their fee income, which is around 26% of the fee income of the industry. But this analysis is based on foreign banks’ India operations. The price of Standard Chartered’s IDRs will reflect the strength and weaknesses of its global operations, of which India is a part.
The IDR will definitely increase Standard Chartered’s visibility and may also encourage many other foreign entities to list in India, but it will not make any difference to the overseas banks’ play in India.
HSBC has been in India since 1853 and Citibank, which has the biggest asset base among all foreign banks in India, is 107 years old. With around Rs1 trillion of assets, HSBC has close to 50 branches. Citibank is present in 29 centres through 42 branches. Among other foreign banks in India, ABN Amro Holding NV (31 branches) is 90 years old, Deutsche Bank AG (13 branches) is 30 years old and Barclays Bank Plc (seven branches) is not even four. All of them need to be more innovative and aggressive to come closer to Indian consumers.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at firstname.lastname@example.org