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February 28, 2001                                       Feedback  

    - EXIM POLICY '00



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Fungibility offers liquidity avenue

BS Markets Bureau

The finance minister's announcement on allowing the two-way fungibility of American depositary receipts (ADRs) and global depositary receipts (GDRs) through reconversion of local shares will provide liquidity to depository receipts of domestic companies listed abroad.

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 the shares back to ADRs/ GDRs subject to sectoral cap prescribed for the foreign investment.

The investors are now allowed to convert the shares back to ADRs/ GDRs, and this means that the depositary receipts market of several domestic firms will see increase in trade volumes, said an official of a leading merchant bank.

Companies, which issued shares in the foreign markets through the issue of ADRs/ GDRs and got listed on foreign bourses have seen erosion in trade volumes in the depository receipts market as bulk of the ADRs/ GDRs had been converted back 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 price differentials in domestic and foreign market of these shares.

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

The finance minister has also permitted domestic companies to list on foreign stock exchanges by sponsoring ADRs/ GDRs issues against block share holding. This facility will have to be offered to all categories of shareholders.

"It has been an established fact that certain ADR/GDR rule at premium over the domestic market and few were able to take advantage of this fact. However, the permission to convert domestic shares into ADRs/GDRs will provide the foreign institutional investors (FIIs) and domestic investors, a much bigger opportunity to avail the arbitrage within the overall foreign portfolio investment limit, which also has been increased," leading stockbroker Paresh Khandwala said.

The full investment of ADRs in overseas acquisitions is a positive move and this augur well for firms planning overseas acquisition. The software sector will benefit highly as several of them are raising funds through foreign issues for acquisitions abroad.

Source: Business Standard

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