ADR Watch : Possible ADRs in the offing
Wipro
wipro.com
Orchid Chemicals & Pharmaceuticals Ltd
orchidpharma.com
Reliance Industries
ril.com
Zee Telefilms
zeetelevision.com
zeetelevision.com
Satyam Infoway
satyam.net.in
Silverline Indsutries
silverline.com
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ADRs must have a reason
(BL Research)
WHAT do Wipro, Silverline Industries, Reliance Industries, Zee Telefilms, Orchid Chemicals and Satyam Infoway have in common? Well, they are all considering an American depository receipt (ADR) offer for an eventual listing either on the New York Stock Exchange or NASDAQ.
If they succeed in the effort, they will be joining Infosys Technologies and ICICI _ the only two Indian companies to have make offers in the ADR market with listings on Nasdaq and the NYSE respectively.
Indeed, accessing the ADR market and listing on one of the American bourses seem to be the latest trend going by the number of companies that have signified their intention of doing so. The list is predominantly made up of information technology companies but others, such as Reliance Industries and Orchid Chemicals, too have hinted at an NYSE listing through an ADR offering.
This sudden attraction for the American market to raise money is a little worrying considering what happened in the GDR market in the not-so-distant past. Going by the kind of companies that have signalled their intention to access the ADR market, it is not cause for worry yet; but what is, is the increasing tendency among Indian companies to look at the American market for funds and the possibility that the ADR market could end up going the GDR way.
Just consider: In the seven years since Indian companies were allowed to access funds in the global markets, there were 64 GDR offerings from 60 companies. Together, these companies raised a whopping $6.25 billions by offering GDRs to foreign investors and getting them listed on the Luxembourg and London stock exchanges. These figures are certainly impressive, but what is not is that 54 of these (84 per cent), are trading at steep discounts to the offer price.
The kind of companies that accessed GDR market for funds tells a tale. Companies such as NEPC Micon, Jain Irrigation, JCT, South India Viscose, Shriram Industrial Enterprises, Usha Beltron, Ballarpur Industries, Garden Silk Mills, Hindustan Development Corporation and Core Parenterals are among those that raised capital from the Euro market just because the funds were available and easily. Net result? They not only killed the market for other genuine issuers which came later but also created negative perceptions about Indian paper abroad.
Not surprisingly, these are the kind of companies whose GDRs are today being traded at steep discounts of 60 per cent to, even, 95 per cent to the offer price. For instance, the GDR of Ballarpur Industries is traded at around $2 (offer price $100) _ a discount of 98 per cent!
In the initial excitement, these companies rushed to tap what they thought was cheap equity, and foreign investors, not savvy to the ways of Indian companies then, fell prey to the offers, picking up whatever Indian paper came their way, sometimes even paying a large premium to the face-value. It was the success of big names such as Reliance Industries, Grasim Industries and ITC in attracting easy funds at high premiums that pushed smaller players to the GDR market. Something similar seems to be happening now as the resounding success of the Infosys and ICICI offers draw others into the ADR market.
To be sure, companies intending to access the American market still have to get the government's permission but it does not seem to be more than a mere formality. In the last couple of years, the government has also liberalised a number of regulations governing Euro issues. For instance, there are no more end-use restrictions on funds raised abroad and the earlier restriction on the validity of the government permission _ for 90 days only _ has also been withdrawn. The only two restrictions are that the funds cannot be invested in real-estate or in the stock market.
It may be advisable for the government to exercise caution while granting permission to companies to access the American market. Of course, the stringent requirements that are necessary to be complied with for an American listing are by themselves strong barriers but it would, nevertheless, pay to filter the applicants carefully before granting permission. The government should ask the applicants to specify the end-use of the funds and prove that the money being raised is genuinely required for the business. There are two points here.
Some companies seem to believe that they should go for an ADR offer just to list their stocks on the NYSE or on Nasdaq. Listing on an American exchange should not be an end in itself; rather, it should only be the means to an end _ that of raising funds and opening up global business opportunities. Second, companies should not be allowed to raise funds abroad unless they have a use for it.
The practice of raising money just because it is available cheap though there be no adequate use for it, needs to be discouraged. Good examples of this are the external commercial borrowings by Reliance Industries, TELCO, Tata Electric and Sterlite Industries. These companies, among themselves, have about $1.5 billions abroad _ proceeds from earlier ECB offerings that have not been repatriated to India. Such `pre-emptive' raising of funds can dry up the market for future borrowers with genuine projects.
Infosys' and ICICI's successful ADR offerings prove that there is a good market for genuine offers from companies with competent business profiles. That Infosys could raise about $70 millions at a 10 per cent premium to the domestic price of the stock and ICICI $315 millions, also at a similar premium, shows the power the American market can deliver for good Indian offerings. It should be ensured that only the most deserving companies get to tap this market as otherwise we could end up killing the goose that lays the golden egg.
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