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MUMBAI: Overseas investors have a bigger appetite for equity offerings by Indian companies than local investors. Between April and August this year, the amount raised by India Inc through overseas issues, mainly global depository receipts (GDRs), is almost thrice the amount it raised during the same period last year.

According to data available with Prime Database, in FY07 (April-August) so far, corporates have raised $600m through 10 issues consisting of GDRs and other overseas equity offerings. In comparison, they had managed to raise $215m through 13 issues in the same period last year.

According to Ajaj Manglunia, senior vice-president (investment banking), SPA Financial Advisors, “The trend basically shows the bullishness among overseas investors. The appetite for Indian paper is increasing by the year and overseas investors are more comfortable now about Indian equity.” But in spite of the good interest in Indian equity, hybrid and other pure-debt instruments (FCCBs and ECBs respectively) still have the most preferred method for companies raising capital abroad.

Indian companies have been issuing GDRs and FCCBs/ECBs on a large scale since 1992. In 1995, the finance ministry changed laws to provide limited repatriation of the ADR/GDRs so that those instruments could be sold back in India. “The regulator had understood that the rules for raising capital in India were too stringent and hence it had allowed to raise more money in overseas markets through ADRs and GDRs,” said AA Sarma, head of merchant banking division at IDBI Capital.

“Companies go for listing equity abroad because they get some leeway with the regulations (compared to India) and since they get precious foreign currency in return. Besides, it doesn’t result in dilution of equity.”

However, there are also suspicions that the GDR route is often used as a tool for round-tripping, whereby some promoters repatriate illegal money parked abroad through dummy investors.

Indian companies can go for overseas listing mainly through ADRs and GDRs. “Only large cap companies can go for ADRs (listing their securities on American Exchanges). These shares trade at huge premium to the share prices in India,” explained J Niranjan, head of Investment Banking at ICICI Bank. Most mid-cap companies go for GDRs.

Consequently, the premium they get over their share price in India, is not always huge, he added. Hence, if the shares abroad start trading at a premium then overseas investors may want to sell the stocks in India and gain by arbitrage. Most GDRs listed in this quarter, as in years gone by, have been listed on the Luxemborg stock exchange.

In ’02 RBI allowed a limited two-way fungibility scheme, which provided for purchase and re-conversion of only as many shares into ADRs/GDRs that are equal to or less than the number of shares emerging on surrender of ADRs/GDRs actually sold in the market. For issuing overseas equity, promoters through intermediaries offer their share holders an option to tender their shares in an escrow account, which the overseas investors can invest in.

Although ADRs and GDRs are freely traded on exchanges abroad, they are securities which are ‘in custody’ of foreign depositories (banks), and derive their value from underlying shares

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