GDRs

Investment Banking and Finance Services

Indian Institute of Management Lucknow Noida Campus

Objective:
The purposes of this report is to Give a brief about GDRs.

Present a research paper : - PREMIA IN THE INDIAN GDR MARKET An analysis of Trends and Causes by Shivankar Saxena

GDR Introduction
1. A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.

Benefits
To a Company :

Expanded market share through broadened and more diversified investor exposure with potentially greater liquidity, which may increase or stabilize the share price. Enhanced visibility and image for the company's products, services and financial instruments in a marketplace outside its home country. Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions. To Investors : Diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market. Elimination of global custodian safekeeping charges, potentially saving Depositary Receipt investors up to 10 to 40 basis points annually. Familiar trade, clearance and settlement procedures. Competitive Foreign exchange rate conversions for dividends and other cash distributions. Ability to acquire the underlying securities directly upon cancellation.

GDR Markets
London Stock Exchange, Luxembourg Stock Exchange, Dubai International Financial Exchange (DIFX) Singapore Stock Exchange, Hong Kong Stock Exchange.

Indian Context : Need

With the opening up of the economy in 1991, Indian companies have been growing at a rapid pace. With this the economy has also been growing rapidly. Rapid Growth: Indias economy has been growing at a rapid pace. To maintain the pace of such growth, huge amounts of investments are required.ADRs and GDRs enable such huge investments to be made in India. Non availability of funds: The funds available in India fall far short of the funds required to maintain and increase the growth rate of the economy.ADRs and GDRs channel funds from foreign sources to India, thereby enabling such investments to be made. Bullish Market: The Indian market has been showing bullish tendencies in the recent past. Indexes of the two major stock exchanges in India Nifty 50 of the National Stock Exchange (NSE) and BSE Sensex.have been rising upwards consistently in the last two to three years. This upward trend is both the cause and effect of foreign funds flowing in.

Continued .. Growing Investor confidence: As a result of India sustaining the bullish trend and Indian companies growing as fast as they are, global investors have greater confidence in Indian stocks than ever before. This sort of confidence is displayed by institutional investors as well as individual Investors

Research Objective
analyze if there is existence of premium on Indian GDR over the last 5 years and investigate reasons for the same.

If any stock carrying the same risk reward characteristics trades at two different prices in different markets the arbitrageurs will step in and take advantage of the situation till security trades at same price across all markets.

Trend Analysis of GDR Premium

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GAIL (INDIA) Ltd

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Reliance Industries Ltd

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State Bank of India

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Tata Steel Ltd

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Ranbaxy Laboratories

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Regression Findings

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GAIL
Standardized Coefficients

Unstandardized Coefficients

Model 1

B (Constant) 376.166

Std. Error 7.886

Beta

t 47.703

Sig. .000

USD/INR

-9.174

.145

-.791

-63.457

0.000

Adj Close of NSE

-.043

.001

-.760

-47.075

.000

FTSE 100 in INR

.001

.000

.897

55.693

0.000

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Ranbaxy
Coefficientsa

Unstandardized Coefficients

Standardized Coefficients

Model 1

B (Constant) USD/INR Adj Close of NSE FTSE 100 in INR -1.078 -.020 .000 3.035E-06

Std. Error 1.681 .035 .000 .000

Beta

t -.641 -.043 .054 .078 -.564 1.125 1.016

Sig. .522 .573 .261 .310

a. Dependent Variable: %GDR Premium

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Reliance
Coefficientsa
Standardized Coefficients

Unstandardized Coefficients

Model 1

B (Constant) 412.909

Std. Error 51.176

Beta

t 8.068

Sig. .000

USD/INR

-4.661

1.047

-.325

-4.453

.000

Adj Close of NSE

-.051

.007

-.326

-7.329

.000

FTSE 100 in INR

.000

.000

.182

2.514

.012

a. Dependent Variable: %GDR Premium

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SBI
Coefficientsa

Unstandardized Coefficients Model 1 B (Constant) USD/INR Adj Close of NSE FTSE 100 in INR a. Dependent Variable: %GDR Premium 17.090 -.325 -.003 3.468E-05 Std. Error 1.246 .023 .000 .000

Standardized Coefficients Beta T 13.718 -14.244 -18.233 17.311 Sig. .000 .000 .000 .000

-.366 -.607 .575

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Tata Steel
Coefficientsa

Unstandardized Coefficients

Standardized Coefficients

Model 1

B (Constant) 33.447

Std. Error 3.367

Beta

T 9.933

Sig. .000

USD/INR

-.537

.065

-.546

-8.276

.000

Adj Close of NSE

-.001

.000

-.160

-3.526

.000

FTSE 100 in INR

1.134E-05

.000

.134

2.159

.031

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Conclusion
Overall, all the 3 independent variables show significant contribution to the trend in GDR premium %. Also, the beta with exchange rate and NSE is negative whereas the beta is positive for the FTSE 100. It could be said that a stronger rupee has contributed positively to the GDR premium. Also, if the Indian NSE index is declining then it contributes positively to the GDR premium. These 2 statements are a bit contradictory wrt the growth of Indian economy as usually the rupee appreciates and the NSE index is on the rise on the account of positive economic growth. Also, if the London FTSE index is declining then it contributes negatively to the GDR premium. This finding isnt surprising as the companies considered for the study dealt on the London Stock Exchange. Aforementioned findings explain the converging trend in the GDR premium on the Indian GDRs listed in the London Stock Exchange. Also, it might give some useful insights to the foreign investors looking to leverage the GDR premium on the Indian GDRs.

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Analysis of Institutional Framework

In this section, we focused on laws regarding capital account transaction in India, including the rules and exact procedures for investment by foreign nationals in Indian securities market and repatriation of those funds. In order to understand whether these laws maybe the reason for GDR premiums, we have also investigated laws regarding capital account transactions in Hong Kong, Germany, and South Korea. Portfolio investment is relatively straightforward in India. Even retail investors can trade freely via a sub-account with any registered Foreign Institutional Investor (FII). We find that there are virtually no restrictions on portfolio investment in Germany, Hong Kong and South Korea, too. Repatriation of capital, profits and dividends is also free of any restrictions in India, Germany, Hong Kong and South Korea. As far as these factors are concerned, Indian capital markets have the same structure as developed capital markets (like Germany) and some vibrant markets (like Hong Kong and South Korea). There is, however a crucial difference in GDR provisions of India and these countries. It is possible to convert GDRs into equity shares and conversely, equity shares into GDRs, without restrictions, in Germany, Hong Kong and South Korea. In India, the rules are different. The GDRs have only limited two way fungibility .

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Analysis of Institutional Framework

What this implies is that GDRs can be freely converted to equity shares, but equity shares in India can be converted to GDRs only to the extent of past conversion of GDRs in that company into shares. This is technically called headroom. If no GDR has been converted back into equity shares, it implies that no investor can buy shares in India and convert those shares into GDRs. The implication of headroom provision is that if GDRs trade at a premium, it is not possible to conduct an arbitrage (i.e. short GDR and go long the Indian equity), because Indian equity cannot be converted into GDR (to close out the short sale), unless head room is available. In the absence of headroom, it is difficult to convert Indian equity shares into GDRs (due to limited fungibility). Any arbitrage by way of short selling GDRs in UK and buying the underlying security in India seems not possible. In that, the GDR provisions are certainly different from a developed market like Germany and emerging markets like Hong Kong and South Korea. It is realistically not possible to readily convert Indian equity shares into GDRs listed on the European equity markets, which makes it difficult for any investor to take advantage of GDR premiums.

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Thank you.

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