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Liquidity gets a booster dose

BS Corporate Bureau

Union Finance Minister Yashwant Sinha's announcement on allowing the two-way fungibility of American Depositary Receipts and Global Depositary Receipts through reconversion of local shares will provide liquidity to depository receipts of domestic companies listed abroad.

Liquidity of ADRs/ GDRs of several firms have been affected as over the years a bulk of GDRs/ ADRs are converted into shares.

Under the existing guidelines, ADRs/ GDRs issued by Indian companies are allowed only to convert into underlying shares. Now the government has allowed investors to reconvert shares to ADRs/ GDRs subject to the sectoral cap prescribed for foreign investment.

This means that the depository receipt market of several domestic firms will see an increase in volume of trading, said an official of a leading merchant bank.

Companies which issued shares in foreign markets through issue of ADRs/ GDRs and got listed on foreign bourses have seen erosion of volumes of trade as a bulk of the ADRs/ GDRs had been converted into underlying shares over a period of time.

The new initiative will also offer better arbitrage opportunities for market players as they will be able to take advantage of the price differential in Indian and foreign market of these shares.

This will also reduce the price distortion in the two markets due to lack of liquidity, market players said.

The finance minister has also permitted Indian companies to list in foreign stock exchanges by sponsoring ADR/ GDR issues against block share holding. This facility will have to be offered to all categories of shareholders. The full investment of ADR receipts in overseas acquisitions is a positive move and this augurs well for firms planning overseas acquisition.

The software sector will highly as several of them are raising funds through foreign issues for acquisitions aboard.

Avijit Agarwal, chief dealer-money and securities, ABN Amro Bank NV, Bombay, said: ""The intent so far is correct. There are a lot of reforms which are very positive such as allowing forward trading in sugar and full investment of ADR receipts in overseas acquisitions.

"Bonds have taken off on the savings rate cut. A cut of 1.5 percentage points in some cases has come as a bit of a surprise. The market expected a cut of 1.0 percentage point. There could be a mild correction, but the outlook is positive."

Source: Business Standard

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