IFR: What has the market impact of the Sahoo Committee recommendations on depositary receipts been? Have expectation levels among Indian issuers potentially looking to issue depositary receipts changed as a result of what is now possible?
Neil Atkinson, BNY Mellon: Thanks, Keith. I think before I touch on that question, just two quick things, one is to congratulate Mr Sahoo on two fabulous reports. The second one is to congratulate you for holding this event two days before our annual DR issuer conference that Mr Sahoo will be speaking at. I think in England that’s called gazumping.
Certainly since publication of the Sahoo Committee report, we’ve seen a tremendous amount of interest, including over the last couple of days here in Mumbai speaking to some of our clients who have GDRs listed in London, Luxemburg, Singapore and elsewhere, or prospects we’ve been speaking to over several years who’ve been contemplating having a GDR programme but who may not necessarily have wanted to raise capital.
For companies that wanted perhaps to access new investors but couldn’t do that because of the way Reg S GDR programmes are structured, there has been no availability for them to do so. So without us actually bringing up the subject of Level 1 ADRs, our clients and prospects have actually been bringing that topic up to us before we could get them there.
That’s a sea-change for us after being pursuing this holy grail of Level 1 DRs in India for many years now. We produced a report at the start of last year, we called it rather grandly: “India: Easing Conditions for Investors”. That report was fundamentally just an analysis of investors’ public filings.
We looked at investors who have been investing in Indian depositary receipts in restricted or unrestricted ADR form. We then looked at whether or not those investors are investing locally in India. So: we looked at the investors who invest in DRs overseas and in Indian companies and cross-checked to see if those same investors were investing in India. Only 50% were. So this backed up our findings or what we’d been hearing from investors over the years that they would like easier access to Indian companies.
What we often heard in India of course was that any investor who wants to come to India will do so. I think I read there are 1,500 registered FIIs here in India. If that’s the case and if a company wants to raise US$1bn in India through a QIP; that can be done.
Foreign investors now have easy access to the Indian markets and as Mr Sahoo said, that’s changed, over the last 20 years. What we’re talking about doing here is non-capital raising DRs, so Level 1 ADRs, accessing investors who don’t come to or cannot come to India directly, or don’t want to invest in derivative products or ETFs but need to access Indian corporate equity in US dollar-denominated form.
What we’ve been hearing from those investors is that they can’t wait for this momentum to pick up. In summary, that’s where we are at the moment.
IFR: Bharat, can you back up this momentum that Neil talks about? The government only accepted the recommendations of the Sahoo report in May. It’s all happened very quickly.
Bharat Reddy, JP Morgan: Neil covered some of the subtle market implications of the Sahoo report. I’d like to draw attention to a couple of lesser-known aspects of Mr Sahoo’s seminal work. One is the calculation of public float, having depositary receipts as part of the free public float for listing on the domestic bourse. As the guidelines exist, the numerator and the denominator where a company has its authorised share capital issued in the form of GDRs or ADRs is excluded, which is fairly illogical because it’s held publically.
I think this will make a significant difference to a number of companies which have threshold issues regarding their FDI limits also and their ownership limits. I think this will open up a completely new avenue for companies to explore, expanding their GDR and ADR programmes overseas.
As I’m sure many members of the audience are aware, there exists a scarcity premium with certain ADRs in the overseas market. This is purely due to the fact that India is a capital-controlled economy and there’s limited fungibility between the underlying stock and the ADR itself. If you have a sponsored tender offer where a promoter shareholder has to sell down his or her stock to meet the domestic listing guidelines or minimum 25% public float, it does appear a bit unfair that they cannot encash this premium in the overseas market and have to dilute domestically. I think there is a bit of an inequality there which will be removed once Mr Sahoo’s recommendations are implemented.
Also, as Neil mentioned, Level 1 programmes, or over-the-counter programmes will, I think, exponentially increase out of India. A number of clients we’ve met have a significant interest in exploring this avenue of attracting new pools of capital which cannot invest directly in India. This is indeed the international norm, so there is no real reason why Indian companies should be precluded from doing so.
IFR: That’s a perfect segue to you, Marco. You clearly have a perspective on all of this as an international regulated marketplace. I’m assuming you have no interest at all in either unsponsored or Level 1 ADRs. Could you respond to that point but also expand on what you are bringing to the table here?
Marco Estermann, SIX Swiss Exchange: Absolutely. Our interest as an exchange is mainly with sponsored DRs where companies are looking to list in an overseas market in order to raise capital and to tap into new investor pools. I think that’s basically one of the main things we bring to the table.
Look at an exchange as a gateway for an issuer to tap into new pools of capital. That gateway has locks on it and investors lie behind that gateway. Now those locks can be easy to open or more stringently so. What we bring to the table as an exchange is easy and efficient access to new pools of capital, new investor classes that are not able to invest in Indian companies or which have difficulty finding exposure to Indian corporates by directly investing domestically.
The Sahoo report will certainly help, as Neil and Bharat have already mentioned. It’s something we see here as well. We’ve been coming to the Indian market for the last two years. The development, the sentiment, the interest of companies since the first press release came out in September last year that something will change has been very clear. But especially since the report was published in May this year, the change in interest levels has increased substantially.
I think that’s a very positive sign. It’s a positive sign for overseas investors but also for Indian companies in terms of attracting new pools of capital and new classes of investors going forward.
IFR: Mr Sahoo, do you see any downside to a swathe of Indian companies opting for unsponsored DR programmes?
M.S. Sahoo: India has a fairly developed and competitive onshore market. It is in a position to attract foreign companies. To that extent one can expect activity both ways. On the ADR front and BhDR front, we have recommended both capital raising and non-capital raising programmes as well as sponsored and unsponsored programmes. The implication of this is that we may experience significant export of capital markets out of India, at the same time significant import of capital markets from overseas.
If there’s pressure from capital inflows, there must be a way to release the pressure through capital outflows. So India is no longer in a situation where it will see only one-directional flows. I don’t see any threat either way; India attract foreign investors to India and would encourage Indian investors to go out.
Coming to the public float part which was raised earlier, takeover regulations in India require that if you, as a DR holder, have the right to give instructions to your depositary bank to vote in a particular manner, you are subject to the takeover regulations. If you are subject to takeover regulations, then you must have some privileges too.
That’s why we’ve recommended if you have the right to give voting instructions and if the DRs are listed on an international exchange, those DRs will count towards the public holding. But we have some restrictions in the case of unsponsored DRs. An unsponsored DR means a group of shareholders have joined hands and as per their understanding with the depositary, have surrendered their shares.
Let’s say this group of shareholders were a part of the public shareholding before the DR issue. If they surrender the shares to a depositary and that goes out of the public shareholding, the company will fall foul of the law; it will not be able to meet the requirements for public holding for no fault on its part.
Let look at the converse. Let’s say a company is not meeting public holding requirements today. If you allow DRs to be a part of the public holding, a promoter will transfer some of his holding to a depositary and the DRs issued on that holding will count towards the public holding. So we have both possibilities: some public shareholders can create concerns for the company while a promoter can take undue advantage if the shares behind DRs are considered a part of public holding.
To balance these two, we have recommended: let there be voting rights and let these be issued on an international exchange, then it will count for public holding. The corollary of that is that there can be unsponsored DRs only if those two conditions are met.
Another aspect as regards BhDRs is that today there are some restriction on investors. Insurance companies are not allowed to invest in IDRs. That’s a problem in general in the country. Many pension funds, insurance funds, the Employees’ Provident Fund Organisation (EPFO) have a lot of restrictions on their investments.
We should allow everybody to invest in BhDRs. In fact, we should enable them and encourage them to invest in BhDRs. Remove the restrictions. And remove the restrictions on investors who are not allowed to participate in the currency market. BhDRs are foreign currency transactions, so people must have a way to hedge, so allow everybody to participate in the exchange-traded currency derivatives market.
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