Overseas companies have been permitted to list Indian depository receipts, or IDRs, since 2004. For a variety of reasons, including tax treatment, the instrument hasn’t attracted serious interest from overseas firms. UK-based bank Standard Chartered Plc’s recent announcement that it would raise as much as $750 million (Rs3,330 crore) through a sale of IDRs and seek an Indian listing seems to have many implications.
First, it represents a reversal of what has been the practice so far of Indian firms with global aspirations seeking to list on overseas exchanges, largely because that was where the money was, and also because an overseas listing provided a certain credibility that could help access to money markets in the future. Instruments such as global depository receipts (GDRs) and American depository receipts (ADRs) helped them tap a new base of investors who wanted to either participate in India’s growth story or to simply diversify their holdings. It would appear now that a large international bank feels that it has access to reasonably priced capital in India and finds it worthwhile to extend its investor base to India. This instrument signals a more direct tapping of the wealth of retail investors in the country, as distinct from corporate flows through acquisitions, imports and so on.
IDRs will also make it possible for Indian investors to expand their exposure to overseas markets. Though investors have been permitted to invest in shares abroad, this has been limited to around Rs2 lakh, and has been cumbersome because of the mechanics of dealing through specific types of bank accounts, the need to create foreign dematerialized accounts and so on. IDRs will help investors circumvent these procedural issues.
For companies, such instruments also make sense for reasons other than access to capital. In addition to simply raising capital, an IDR might give the firm an acquisition currency in this country. It would be possible, perhaps, to offer IDRs in lieu of cash when making acquisitions, offsetting some of the exchange-related concerns that might otherwise have been present. Similarly, it is possible to offer locally listed stock to employees as part of the employee stock option plan.
From the perspective of corporate governance it will, at least in theory, be possible for some Indian investors in the listed entity to have an element of say in the operations of the overseas entity. As I had mentioned earlier, several large entities operate in India actively, but being unlisted, their performance, or lack of it, within India appears below the radar of their current investor base, which lies overseas.
Even the overseas shareholders of the same firm are likely to see some merit in the presence of a larger and more diverse body of shareholders. For instance, if a US firm has 15% of its sales coming from India, it is beneficial even to its extant American shareholders for there to be Indian shareholders and an analyst community that can comment meaningfully and with local knowledge on the appropriateness of policies followed by the management of the company in this particular market. Over a longer period of time, one could also see Indian investors taking larger stakes and potentially even seeking to exercise an element of active control over companies through their IDR holdings.
In much the same way that the overseas analyst community created a following for listed Indian entities overseas, we should now expect Indian analysts to start following the international performance of Standard Chartered and its peer banks. Such tracking will provide analysts and investors an insight into other interesting investment opportunities. Potential analyst interest from India can, in turn, result in those companies seeking to list in this country.
On a philosophical plane, the presence of new kinds of financial instruments, if well monitored, is a generally positive influence on the economy and adds breadth and depth to parallel financial markets such as those for fixed income, currencies and so on. In the same way that Tata Capital Ltd’s non-convertible debenture issue last year triggered greater interest in the bond market, one hopes that Standard Chartered’s IDR listing will encourage other overseas companies to seek IDR listings.
The listing of overseas entities in a market outside their home base has historically been seen to be of symbolic importance in the conversion of that market into an international financial centre. One would hope that a greater number of listings by overseas companies will be a step towards Mumbai becoming an international financial centre.
Govind Sankaranarayanan is chief financial officer, Tata Capital Ltd. He writes on issues related to governance. The views expressed in this column are his own.
Write to him at firstname.lastname@example.org