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THE DECKS ARE clear for overseas investors to trade in the stock markets here against the depository receipts of Indian companies they hold. The RBI has issued the regulations under the Foreign Exchange Management Act, and the Government has notified them. It has taken the Government nearly one year to do this — not a particularly good advertisement for its reformist credentials. For the Finance Minister had announced this in his last Budget, and the next is at hand. By making depository receipts fungible, the Government has removed a disqualification that capital offerings made abroad suffered from. Future offerings have thus become more attractive.

For all the hype about the growth potential of the economy, the fact remains that even the best Indian companies tapping the overseas market are unlikely to command a huge response. In the event, the opportunity to tap the vast pool of domestic investors by offloading their stake in the secondary market, now made possible, should help companies get a better price. To the extent this makes investment in Indian equity that much more attractive, capital mobilisation by Indian corporates becomes easier. Anyway, the Government as a facilitator of commerce had a commitment to deepen the market for capital offerings by domestic companies to all classes of investors. Implicit in the invitation to subscribe to the shares of a company is the promise of stock exchange listing to enable easy exit. From this perspective too, the logic of the latest initiative is unexceptionable. Of course, the domestic investors would still be denied the privilege of directly offloading their stake in overseas markets where the shares might be listed. But that is an inevitable consequence of the rupee still not being fully convertible.

The development might narrow the differences in a company's share price between domestic and overseas markets as the attempt by overseas investors to profit from an arbitrage opportunity should lead to a convergence of prices. But the freedom the overseas investors get to enter and exit at will from the domestic market could spark a speculative bubble in local equity prices. It is no secret that some of the monies that flowed into ADR/GDR offerings in reality belonged to domestic investors, and even promoters. These were usually secreted out of the country via the hawala market. The ADR/GDR programme allowed laundering, but a perpetual cycle was not possible till now. Nor could such monies influence domestic prices on a sustained basis. Once the depository receipts were converted into domestic equity, they stood registered as that. It would require a new overseas offering — not an easy option considering the regulatory requirements — for a fresh flow of hot money into the local market. But the latest policy change allows for a seamless flow of fresh hot money to come into the domestic market, and equity prices could be subject to speculative pressures afresh. The RBI and SEBI would need to be extra vigilant to cope with these challenges.

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