StanChart IDRs tank as sebi bars conversion into underlying shares

MUMBAI: Standard Chartered's IDR, the first in India, sank to its lowest since debut a year ago after the market regulator said that the bank cannot convert the IDRs into underlying shares.

The Indian Depositary Receipts (IDRs) closed at Rs 94.55 on the Bombay Stock Exchange, down 17.5% from the previous close. Intraday, it hit the 20% lower circuit, which is also a 52-week low.

The move implies that IDR holders will not benefit from arbitrage due to the price gap between the Indian exchanges, where the IDRs are listed, and the London Stock Exchange or Hong Kong Stock Exchange, where the underlying shares are listed.

"The move has reduced the attractiveness of this instrument for traders," said Lalit Thakkar, managing director - institution, Angel Broking .

The conversion of IDRs into underlying shares will be allowed only if the annualised trading volume over the six months preceding the redemption is less than 5% of the total securities issued, Sebi said. However, the trading volume of StanChart's IDR was higher.

StanChart had said in its offer document that the IDRs could not be converted into underlying shares before one year from the date of issue. The one-year lock-in for the IDRs was to end on June 11, making them eligible for conversion.

Experts said the capital market regulator's recent move, along with issues such as lack of clarity on tax, voting rights, absence of arbitrage opportunity and insurance companies not being allowed to invest, could further put off foreign companies from listing in India. Since the listing of StanChart IDR in June last year, no other global company has shown interest in the instrument.

"One of the reasons for no other IDR was the lack of clarity on redemption. However, there is still lack of clarity on capital gains tax and non-participation of insurance companies. If the IDRs are to be promoted, then there is need to put them on par with shares of listed companies," said Pavan Kumar Vijay, managing director, Corporate Professionals.

IDRs incur short-term capital gains tax of 30%, double of what is charged for shares and also have a long-term capital gains tax of 20%, which is exempt on shares. Also, Sebi has not given clarity on voting rights for IDR holders, leaving it to the discretion of the issuer.

"We are hopeful that there would be more clarity on policies around imposition of capital gains tax and permitting insurance companies to invest in IDR. These changes could boost the IDR market," said Neeraj Swaroop , regional CEO - India and South Asia, Standard Chartered Bank .

Suhail Nathani, partner, Economic Laws Practice, said, "The issuers have several options and listing in India must compete with other jurisdictions. Regulatory authorities should address concerns and make policy to attract issuers and investors alike."

India contributes around one-fifth of the UK banks profit and oneeighth of its revenue. The IDR has seen FII holding doubling to about 70% in March from 38% on the day of listing, while retail participation has been flat at 8%.