StanChart IDRs gain 20% this year on weak rupee

Dollar's gains against the rupee open arbitrage window; experts advise against deciding only on the basis of currency trend

Standard Chartered’s Indian Depository Receipts (IDRs), traded on the Indian bourses, have proved to be an effective hedge against the fall in the rupee.

In recent months, the rupee and the Standard Chartered IDRs, whose underlying  shares are listed in London and Hong Kong, have been inversely correlated. The local receipts of the London-headquartered lender have rallied a little more than 20 per cent this year, mirroring the gains in the dollar vis-a-vis the rupee.

The fall in the domestic currency has created an arbitrage opportunity between the partially-fungible IDR, which are rupee-denominated, while the underlying shares are valued in pounds (GBP) or the Hong Kong dollar (HKD). Both the GBP and the HKD have appreciated by nearly 18 per cent each against the rupee so far in 2013.

In simpler terms, as the GBP has strengthened against the dollar, it can fetch more IDRs than before. Therefore, as the rupee weakens against the developed world currencies, the IDR stands to gain, explains StanChart. Ten of their IDRs equals one underlying share.

“Investing in these is like buying a foreign currency asset. You are getting an international exposure without really investing abroad,” said a banking analyst with a foreign brokerage.

Added portfolio manager Sandip Sabharwal, “This has been a good year for investors who have invested in foreign securities. Most developed markets have performed well this year.”

The S&P 500 index in the US is up 15 per cent this year, while the UK's FTSE 100 has gained 10 per cent. Meanwhile, the Nifty index here has fallen nearly eight per cent, while the BSE banking index has fallen 30 per cent. Interestingly, the StanChart IDRs have rallied even as its underlying shares have declined 10 per cent this year.

The fall in the rupee has come as a shot in the arm for investors in India's sole-listed IDRs, languishing since its listing in June 2010 due to regulatory restrictions. The IDRs have always traded at a discount to its underlying shares due to various issues, such as fungibility, taxation and a bar on investment by insurance companies.

An important earlier block has been removed, albeit partially. Earlier this year, the Securities and Exchange Board of India allowed IDR holders to convert these into underlying shares (to the extent of 25 per cent of the IDRs originally issued). The regulator is working on ironing out other issues to make these instruments attractive.

Investing in the IDR purely on the basis of a currency call might be a little late in the day, add analysts. “Investing in the IDR can't be a currency play now. I think we have seen the worst in terms of the rupee fall. Exports are seeing an uptick, while imports, especially gold, are likely to fall on the back of the measures taken by the government and the Reserve Bank. One has to take a call on the bank's performance,” said Sabharwal.

The consensus of analysts’ rating on Bloomberg expects the stock to gain 15 per cent over the next one year. Also, StanChart offers a dividend of a little more than four per cent; it could go up, factoring in the weak rupee.