Regulatory Fears Put Brake on Indian ADR Plan

Financial Times

Regulatory fears put brake on Indian ADR plan

By Elizabeth Wine in New York

A plan by the Indian government to increase local companies’ ability to offer shares on US markets has been stalled by concerns about how to monitor foreign ownership of Indian businesses.

The Indian government proposed a rule in this year’s budget to allow ordinary shares of Indian companies to be exchanged for American depositary receipts or global depositary receipts and vice versa.

There are a total of 117 Indian ADRs. The Bank of New York’s index of Indian ADRs has posted a loss of 28.7 per cent this year.

At present, the supple of ADRs of Indian companies is shrinking. If a US or other foreign investor cancels ADR or GDR shares—either keeping the underlying shares in their own brokerage account of selling them to an Indian investor—the exchange is over. More ADRs cannot be created from underlying local shares and sent back to the US.

The new rule would not give investors full freedom, because the supply of ADRs would still be limited to the amount of initially offered. But it is to be expected to help trading and eliminate the premium that arose when the supply of ADRs could only decrease.

However, Indian regulators are concerned that the new two-way swapping could result in foreign investors building up large positions in Indian companies without the knowledge of regulators or the depository banks.

A US investor with ADRs could cancel the ADR and, instead of selling the underlying shares back to an investor in India, keep them in his brokerage account in the US. They could they buy more ADR shares and repeat the process.

“They’re worried about who’s going to monitor these limits on foreign investment. They do not want to allow some foreign investor to take control of their companies,” said Vincent Cayhill, regional manager for Asian client services at the Bank of New York.

Foreign investors are barred from collectively owning more than 49 per cent of an Indian company, while the limit for individual ownership is 10 per cent.

Mr. Cayhill said what makes tracking ownership difficult is that the depository institution sponsoring the ADR would not necessarily know how many shares were owned by whom. If an investor held the ADRs in a brokerage account, the institution, such as Bank of New York, would only know that the broker held a block of shares in a given Indian company.

However, he was confident that regulators could work out a monitoring system.