StanChart's unhappy ending pulls the curtains down on much-touted IDR

India's sole IDR ceases to exists next week; unfavourable regime with regards to taxation, trading and fungibility, and high cost of disclosures and listing, spelled death knell for StanC's IDR

On this day a decade ago, John Peace, the then chairman of Standard Chartered Bank (StanC), rang the bell to mark the India listing of the London-headquar­tered lender. After home market London and global financial hub Hong Kong, India was the first turf where the bank opted to list, boosting the image of the country, which had already caught investors' fancy with consistent high growth.

The bank’s successful initial public offering (IPO) stoked optimism that more global companies with a strong India presence would opt to list domestically through Indian Depository Receipts (IDRs). However, StanC’s “unhappy ending”— as a former senior executive calls it — means curtains for India’s dream of attracting global companies to list here. 

An unfavourable regime with regard to taxation, trading, and fungibility, besides the high cost associated with disclosures and listing, spelt the death knell for StanC’s IDR, say experts.

In March, the bank launched its 90-day termination programme, which ends on Monday, after which the sole IDR will no longer be traded on the Indian bourses.

“We are providing all necessary assistance to our IDR holders to complete the relevant formalities for the termination of our IDR progra­mme,” StanC said in a statement to Business Standard. Under the programme, IDR holders have opted to convert their holdings into underlying shares or cash out at the prevailing market rate in London.

India listing a leap of faith

When StanC opted to list in India in 2010, there were thorns in the country’s IDR regime, which was introduced in 2004. However, the former executive says it was a “leap of faith” for the bank.

“StanC raised less than Rs 2,500 crore through the IDR, which it could have raised anywhere at the drop of a hat. The bank opted to do an IPO here to gain more visibility. After London and Hong Kong, India was a major market for the bank back then. The listing framework wasn’t favourable as IDRs were not treated at par with other domestic shares. However, the bank felt the authorities would address the issues along the way to increase the attractiveness of IDRs. The country in its wisdom never chose to do so,” he said.

Soon after its listing, StanC’s IDR traded at a discount of as much as 50 per cent to its underlying shares in London. While this created an arbitrage opportunity for savvy investors, it discouraged potential issuers.

“There are multiple factors why IDRs never took off. The discount to traded price was higher than what issuers were willing to offer. Also, the restrictions around fungibility dried out the liquidity in these instruments. Further, the IPO disclosure requirements and review process were too cumbersome, which discouraged potential issuers,” said Sudhir Bassi, executive director, Khaitan & Co.

Fungibility means the ability to convert IDRs into underlying shares and vice versa. The Securities and Exchange Board of India (Sebi) in a circular in 2013 issued new guidelines that allowed partial fungibility. While the rules were aimed at “encouraging more number of foreign companies to issue IDRs,” market players said these failed to have the desired impact.

Vidisha Krishan, partner, MV Kini & Co, says lack of liquidity and unclear tax structure plagued the IDR regime. “The success of any American or global depository receipts hinges on liquidity. There was flip-flop around the IDR regime, which discouraged investors. Also, taxation was not clear. The rules should have been framed in such a way that the IDRs were treated at par with domestic shares,” she said.

IDR regime needs rethink

Market experts say the StanC episode will discourage foreign firms to list in India. However, if the Centre in future decides to revive the project, the entire regime could require a rethink. Some believe regulations are only one part of the story and strong economic growth encourages companies to list here. “When StanC listed, India was growing at close to 10 per cent. If India gets back to that kind of growth rate, many global firms will be excited to not just do business but also to list here to gain more visibility,” said an investment banker.