| Two-Way Fungiblity in ADRs is happening |
Here it is, finally. After more than a year, the government finalised the norms for extending two-way fungibility to companies tapping overseas markets. Now, companies will be permitted to maintain the levels of ADRs/GDRs without seeking fresh government clearances. In other words, they will be permitted to reissue ADRs/GDRs up to the level for which they hold a original clearance without seeking a fresh approval every time a depository-holder divests his holding. Till now, it was mandatory that the ADRs/GDRs should be converted into shares before they could be divested in the domestic market. The result was, every time a conversion took place, companies had to seek government permission to reissue the depositories. Flexibility in this regard was demanded by most ADR/GD issuers since a smaller float in the international market leads to thin trading and faulty price realization.
The move augurs well for the ADR/GDR
holders, who can now take an active part in the buoyant M&A markets in Indian
corporate world. In simple words, earlier if an ADR holder wanted to offer his ADRs for
participating in the open offer, in case of a takeover, these (ADRs) had to be first get
converted into domestic shares in order to make them eligible for participating in the
open offer. However, in the case of those shares not getting considered by the company, in
case of any oversubscription, the ADR holders had to lose their rights over their holdings
as those (converted) shares could not get reconverted into ADRs. But as per the latest
norm on the two-way fungibility, these shares can now be reconverted into ADRs/GDRs.
Currently, 20 odd Indian companies have issued ADRs/GDRs and all these companies stand to
gain by the relaxation. And the first Indian corporate to avail of the two-way fungibility
of shares is Reliance Industries. The company approached the government for permission to
launch up to $1-billion ADR/GDR issue. This issue is part of Reliance Industries’
plans to divest 13 per cent of its stake in RPL. At current market price, the 13 per cent
stake sell in RPL is estimated to fetch a whopping Rs 3,024 crore.
Providing two-way fungibility to companies is one of the milestones on the road to full
convertibility. This will precede two-way fungibility for individuals. At present,
convertibility is permitted on the revenue account to every one, but capital account
transactions are regulated. This means that while individuals and companies can bring in
dollars, there are several restrictions on the outward remittances by resident Indians.
The timing of this relaxation is particularly crucial since the ADR markets have recently
opened up and several Indian companies have gone to the international market for funds,
credibility and as part of their globalisation measures. The move will improve liquidity,
eliminate arbitrage opportunities and also curb volatality in the Indian ADR and GDR
markets, making it more attractive for international investors. This relaxation will not
only benefit corporates, and in future individuals, but also will help government to
manage its burgeoning foreign exchange reserves, which now stand at $43 billion, including
the gold reserves. All in all a good move by the government. A move to be appreciated!
S Suma
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