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GDR era returns for Indian companies

Vinod Mathew

Mumbai , July 21

MOVE over Mumbai. Luxembourg, London, and Singapore are emerging as the preferred destinations for Indian corporates aiming to tap the financial market. And it is not by way of debt instruments alone, as ECBs and of late FCCBs are making way for GDRs.

One could call it the return of GDR era. Coming a good 11 years after the last big shout on the GDR front by Indian companies in 1994, when as many as 40 Indian companies took out GDRs, mostly in Luxembourg, 2005 is shaping up as a renaissance year for Indian companies raising funds through equities in the overseas market.

While Indian companies mopped up $2,860 million from the overseas equity market in 1994, this year has seen Indian companies raise as much as $1,130 million from only 15 GDRs.

And the going can only get better in the coming months as more placements are happening, according to Mr J. Niranjan, Joint Head of Investment Banking, M&A Advisory, ICICI Securities.

"If one witnessed Indian FCCBs come of age in 2004, it is apparent that 2005 is going to be the year of Indian GDRs. True, some companies may be going the GDR route to avoid the tedium of one-year lock-in for institutions in domestic placements. But there are an increasing number of genuine GDRs that are taking place in this year."

The funds raised through FCCBs in 2004 stood in excess of $2,700 million and the uptrend is continuing this year as the convertible bonds placed overseas till date has crossed $1,570 million. And this route of tapping the market shows no signs of fading. However, the flavour of the coming season is likely to be GDRs.

If most Indian companies are moving the GDR way for their secondary offerings, the reasons are not hard to find. One, it comes only at five per cent discount to the market price, against 15 per cent discount for domestic offerings.

Then there is the issue of cost, with an Indian offering costing over five per cent of the issue size against less than three per cent in the case of a GDR.

"The positives of a GDR are evident on the pricing and marketing front. There is also the aspect of time involved, with a GDR from start to finish taking only two months against three-and-a-half months in the case of a domestic offering," said Mr Niranjan.

On the flip side, there is no denying that the GDR makes an attractive investment opportunity inaccessible to the Indian investor, that too at a time when the domestic markets are flush with funds and lucrative investment areas are hard to find.

Mr Prithvi Haldea, Managing Director, Prime, Praxis Consulting & Information Services (P) Ltd, said: "Some of the smaller companies going for GDRs seem to be using this instrument to side-step the SEBI's regulatory mechanism. This is a disturbing trend as there is much flight of capital. With a domestic market flush with funds, both debt and equity, and with FIIs making a big play, at least some of these GDRs raise questions."

The Indian corporates blame it on the rigid stand taken by the SEBI in the form of the mandatory lock-in period and rigorous listing requirements.

The merchant bankers are quick to point out that in the existing regulatory environment in India it would be faster to raise funds through abroad than from the local market. It appears that GDRs are here to stay.

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Punjab National Bank ICICI BANK

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