Tuesday, 22 January 2019

Slow progress for landmark listing

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The deal faced a number of challenges and required two years of planning, but Standard Chartered’s Indian listing created a new funding alternative for foreign companies with large local operations.

Standard Chartered Bank’s Indian depositary receipt (IDR) listing in June was the first time a foreign issuer had bothered to list in India. It also was not about the money, but about strengthening the brand and cementing a local presence.

The bank met its objectives in the end, but, for a while, the deal looked touch and go. During the first few days of bookbuilding, the deal looked to be struggling to get over the finishing line, but made it in the end as investors came in at the11th hour.

A day before books closed, the Rs25bn (US$537m) public deal was only 11% covered. The lukewarm early response was mostly due to a new piece of regulation that required institutional investors to pay upfront for the shares they bid for, instead of the earlier 10% deposit. Market volatility and the fact that two other new listings at the time were not trading brilliantly in secondary markets also adversely affected the investor response.

However, a rush of orders, mainly from mutual funds and high net-worth individual investors, came through on the last day. The bank also made available a separate tranche from which it raised US$80m with the sale of 36m shares to anchor investors.

The public issue of 204m shares was 2.2 times covered at a price of Rs104 or above the bottom end of a Rs100-115 marketed range. The QIB portion was 4.15 times covered with foreign institutional investors bidding for 253m shares and mutual funds wanting 63m. The retail portion was subscribed only 0.3 times.

The public deal saw StanChart offer 120m shares to qualified institutional buyers, 72m to retail, 43.2m to HNWIs and 4.8m shares to employees. The issue closed on May 28. The price range offered an 8.5% discount to a 6% premium to the London closing price of £16.13 (or Rs109) when the deal launched on May 21 (every 10 IDRs represent one StanChart share).

The demand from investors came in as investors took heart from the fact that the London-listed shares had rallied throughout the week of the launch, making that price range look increasingly attractive.

The fact that the bank emerged unscathed from the recent financial crisis and delivered a remarkable compound annual profit growth of 16.5% during 2004-09 impressed analysts.

Given the hype around the deal and the bank’s fundamental strength, many would have expected the listing to be a blowout success. That, however, did not happen - partly because of Indian regulations.

One of the problems that the deal faced lingers on: not every Indian investor is either able or willing to buy IDRs. Domestic insurance companies are prohibited from investing in IDRs, while foreign institutions have access to StanChart’s stock listed in London and Hong Kong and are unlikely to find the less liquid IDRs appealing. That meant the success of the deal depended heavily on interest from mutual funds, high net worth individuals and retail.

Current tax rules also mean that secondary market trading in IDRs is subject to securities transaction tax and, hence, capital gains tax. Another issue is that IDRs can only be converted into underlying equity shares after one year and with consent from the Reserve Bank of India (RBI). Resident individual investors have to sell within 30 days of any conversion. The IDRs are also not two-way fungible and re-conversion of equity shares into IDRs is not permitted.

The stock has been trading above its listing price and was at Rs114 at the time of writing. However, that is a discount of over 9% to its London shares.

Despite the hurdles the deal made sense for StanChart, because the Indian operations were a major contributor to the bank’s global income. In 2009, about 12% of its total income came from India with the country contributing about US$1.06bn to a US$7.23bn operating profit.

StanChart’s IDR listing is expected to spur a few others to at least think of an IDR - especially foreign companies with large consumer businesses in India. Still, bankers do not expect a flurry of IDRs to hit the domestic market and are pushing for the Indian Government to address the restrictions on investor participation and the taxation issues, as these would go a long way to help an IDR market develop.

The global co-ordinators of the StanChart deal were UBS and Goldman Sachs, while joint bookrunners were JM Financial, Bank of America Merrill Lynch, Kotak Mahindra and SBI Capital. The co-bookrunning lead manager was Standard Chartered Capital Markets.

Shankar Ramakrishnan

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