India 2007: Jumbo ADS drives DR issuance
When the qualified institutions placement (QIP) was introduced to Indian equity markets in May last year, many expected it to spell the demise of the depositary receipt (DR). So far this year, however, a whopping 62% of the US$18.2bn that Indian equity issuers have raised has come from offshore issuance.
A handful of large ADS follow-ons from issuers with established ADS programs have underpinned this year’s buoyant offshore issuance. These include ICICI Bank’s US$2.15bn ADS and HDFC Bank’s US$700m ADS. Two exceptions are Sterlite Industries’ NYSE listing, which raised almost US$2bn, including the shoe, and Genpact’s IPO, which raised almost US$500m. These four deals accounted for close to half of the US$11.4bn raised offshore this year.
By comparison, GDR issuance remains muted due to the rise of the QIP format. “There has been a slowdown in GDRs. Aside from Indiabulls Real Estate and UTI Bank, we have not seen too many GDRs getting done,” said Ravi Kapoor, head of Indian equity capital markets at Citi. “ADRs are different ballgame because you can get into many liquidity pools such as POWLS (public offers without listing) and there are still premiums for ADRs”.
Indian issuers generally seek to list where they are likely to get the highest valuations. In March 2006 Birla Copper became the first Indian issuer to list on the Australian Stock Exchange where it got a high valuation because Australian investors understand mining companies better than most.
Similarly, Indian IT companies have usually gotten better valuations in the US, with ADRs issued by tech firms like WNS and Infosys trading at significant premiums to underlying domestic shares. For many of these IT companies, their customer base is in the US and they choose to list there because it gives them a higher profile among investors.
There are deterrents to Indian issuers aspiring towards a US listing, however. For one, it is far more expensive and there is the Sarbanes-Oxley Act. “It’s probably 50% more expensive to do an ADR … you also have a longer process if you have to deal with the SEC. If it’s a GDR, it depends on what market you list it on, but the local regulators aren’t as difficult there,” said Michael Sturrock, a partner in the Singapore office of Latham & Watkins.
ADR deals generally require two sets of legal counsel, which increases costs, and the issuer is faced with strict liability issues as American investors are more litigious. A fast-tracked ADR deal takes about 120–180 days, whereas a GDR takes about 60–90 days.
The long listing time in the US has prompted some Indian issuers to head to Luxembourg or London’s AIM, where they can list more quickly thanks to a more relaxed regulatory environment. Several Indian real estate companies, for example, have listed in AIM, although some think it is just a fad. However, issues such as thin liquidity and a flow back to domestic shares hampers GDR issuance in London and Luxembourg.
Since the main reason to do a DR is to get a better premium, it makes little sense for Indian issuers to go through the expense and listing requirements of a GDR, if trading is then illiquid and they cannot get a premium.
One reason potential issuers looking to issue a combination of equity together with a foreign currency convertible bond might prefer to do a GDR is because it requires filing only a single document.
Another reason Indian issuers might want to do GDRs is if they have shareholders who are close to crossing the 15% threshold limit in a company, whereby shareholders are required to make a general offer to the public. “If they want to put in further equity, a GDR makes sense because it does not trigger any of the local takeover regulation,” said a Mumbai-based banker. “The requirement of making an open offer only gets triggered when you convert the GDRs into local shares.”
Meanwhile, QIP issuance has become a more accepted because it is efficient, liquid and can gain approval is just one or two days. This year there has been a slew of QIP deals such as IDFC, Max India and Phoenix Mills getting done successfully. Since the QIP format was approved, more than 30 companies have used it, the biggest being IDFC, which raised a record US$519m.