Standard charter?

Standard Chartered Bank’s announcement that it has filed a draft red herring prospectus to raise over $500 million through Indian depository receipts (IDRs) with the Securities and Exchange Board of India (Sebi) marks a dramatic coming of age of the country’s capital market. The announcement is significant for two reasons. For one, this is the first issue of IDRs, the Indian counterpart of global depository receipts and American depository receipts, by an overseas company after guidelines were framed in 2004. For another, since these depository receipts represent equity shares of Standard Chartered — held by an overseas custodian based on which an Indian depository issues rupee-denominated receipts or IDRs to Indian investors — Indian IDR holders will, in effect, own equity shares of a foreign bank and also be able to trade in them as the receipts will be listed on our stock exchanges.

The StanChart experiment is bound to be watched with keen interest both in India and abroad. IDRs provide foreign companies a platform to directly raise capital in India but had not, for a variety of reasons, including somewhat restrictive regulations compared to American or global depository receipts, found favour with overseas companies so far. Thus, the issuer is required to immediately repatriate the rupee funds raised through IDRs outside India , which means they cannot take advantage of any interest arbitrage. Moreover, share price arbitrage opportunities are limited as IDRs do not have two-way fungibility , which means they cannot be converted into underlying shares and vice versa at will. Investors have the option of converting IDRs into underlying shares but only after a year. Even after one year, retail investors are required to sell off the shares obtained by redemption in the foreign stock exchange where they are listed. There is also a lack of clarity on whether IDRs are exempt from capital gains tax. If, despite all this, the British bank is keen to tap the Indian market, it is a clear vote of confidence in the Indian economy . It is also a vote of confidence in India’s macroeconomic stability. It is a good beginning that an established bank, rather than a minor company, is the first one to issue IDRs.