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The cons of IDRs

Shaji Vikraman

AT THE fag end of 1997, an Informal Group on the Primary Market, headed by the then Chief Economic Advisor (CEA), Dr Shankar N. Acharya, had recommended some steps for reviving the moribund primary market.

One of the recommendations made by the group, which included a couple of merchant bankers, was to create a Domestic Depository Market. The avowed aim was to partly internalise the Global Depository Market (GDR) as well as to improve the liquidity in the secondary market.

In other words, the suggestion was to look at the prospects of issuance of an instrument called India Depository Receipts, or IDRs as they are called. Remember, those were the heady days when Indian companies were only looking Westward to raise money through GDRs, thus signalling the long downturn for desi merchant bankers. They are yet to recover from this prolonged phase of low issuance by companies and capital raising efforts.

For close to five years, this recommendation was put on ice. In the interim, someone raised it a meeting of the High Level Committee on Capital Markets (HLC). Allowing issuance of IDRs and companies from the neighbouring countries was not such a bad idea, one official argued. After all in the name of SAARC unity and harmony and in the long-term strategic interests of India, this could be allowed, it was suggested.

That was the last anyone heard of such discussions on the proposal.

This was until Mr Jaswant Singh moved to North Block and announced one day how IDRs would be permitted. To use a cliche, the needle of suspicion pointed to a clutch of merchant bankers and stock brokers in Mumbai, when this popped up again.

With the Minister announcing a 90-day deadline for finalising the regulations for IDRs, the babus at Shastri Bhavan, which houses the Department of Company Affairs, have got into the act, starting off with the rules.

A Mumbai corporate house, notorious for its intelligence gathering and leaking of sensitive papers to hacks, was again one up on the Government. While the Department of Economic Affairs was searching for the definition for IDRs, hacks were gleefully reproducing the draft rules for issuance of the IDRs, thanks to the generosity of the corporate house. This when the DEA was yet to receive a copy of the rules!

Now that the rules are out, there are a lot of red faces around, given the shoddy job done. Allowing issuance of IDRs would mean encouraging overseas companies to list in India, and raise funds. It would also mean providing Indian investors, deprived of quality stocks, a chance to buy into the stocks of reputed companies abroad.

There are policy managers who are put off by the fact that a lot of fundamental issues were not even addressed when the rules were first drafted. Obviously, given a chance (which will ultimately happen when full convertibility of the capital account is achieved) the wealthier of the investors would like to pick up the stocks of Microsoft or IBM, or Citicorp or the like.

When scores of overseas companies have delisted or are in the process of delisting from India, questions arise as to which globally reputed company would like to raise rupee funds and also add more numbers to its shareholding base. Assuming that the IDRs of some of the middle-rung companies or those promoted by industrialists of Indian origin are listed here, would they find takers?

There are other issues also. Would it be prudent to allow companies from abroad, which are not listed at all, in either their countries or elsewhere, to raise capital from Indian investors? In the case of companies listed overseas, there is at least the prospect of working with the home country regulator in case of potential trouble. All this when thanks in some measure to the flatfooted desi regulator, many unscrupulous promoters have gyped investors, thus putting them off from the primary market.

And the instruments being depository receipts, investors would not have voting rights as in the case of ADRs or GDRs. Obviously, the IDRs business would have to be viewed from the perspective of foreign exchange outflows.

Once an overseas company raises money and lists its IDRs here, the money would be taken out. The inflows accrue when Indian investors opt to cancel the IDRs and take the underlying shares.

Officials are yet to even talk about the cap which may be prescribed for companies to raise funds or how they intend to monitor the end use of funds.

The draft rules talk of a five-year record of profitability, a 10 per cent dividend paying record, and a debt-equity norm of 2:1. This brings one back to the basic issue of the likely candidates for issuance of IDRs. Those meeting these norms are hardly likely to be enthused, listing in India.

Indian promoters have already started making threatening noises through their lobbying arms — the assorted chambers and associations. To an extent, they are justified. In a capital scarce country where raising capital is now doubly tough, the new proposal would mean that their overseas counterparts could well have a ball, raising funds from Indian investors at their expense.

However, for desi promoters, moralising, raising the patriotic call or reviving the Bombay Club may not help. If capital raising has become difficult, it is in many ways due to their own dubious track-record.

One cannot also be oblivious of the fact that many overseas investors are now holding useless paper issued by these Indian promoters when they listed their GDRs in London in the early and mid-1990s.

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