Hope regulators will evolve structure for IDRs: StanChart

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UK's Standard Chartered Bank , which is the first and only foreign lender to issue Indian depository receipts, will not be required to convert their IDRs into shares as per the guidelines issued by the Securities and Exchange Board of India. "After completion of one year from the date of issuance of IDRs, redemption of IDRs shall be permitted only if they are infrequently traded on the stock exchange(s) in India," SEBI said.

Talking about the issue, StanChart's group chief executive, Jaspal Bindra said the convertibility was subject to regulations. "Our IDRs are not fungible as trading activity within limits," he told CNBC-TV18 adding that the bank would adhere to SEBI norms. "We are bound by structure of policy for IDR and hope the regulators will evolve a structure for them," Bindra stated.

Below is a verbatim transcript of Jaspal Bindra's interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. For complete details catch the accompanying video.

Q: Your IDR has tanked 20%. Was fungibility an option really for your IDR and how would you explain how the market has reacted to this ruling?

A: When we launched the issue it was quite clear, both, to us and in the announcements we made that the convertibility would be subject to regulatory decisions. I guess they have taken that decision now.

Q: Does the ruling also come as a function of the kind of shareholding structure the StanChart IDR has seen? Your FII holding has gone from 38% all the way up to 70% while retail has been quite low. In that sense, liquidity generated on your ADR remained quite low over the last six months?

A: The requirement that Sebi has for this to be conversable or not convertible is really the level of activity. In their reckoning it has cleared the requirement on activity, so that is why it is not fungible. If for some reason that activity was to reduce to below what they would expect or need then obviously it will become fungible.

Q: Will you look for any sort of redressal on the IDR redemption rules that have been set out?

A: We have to go by the norms. It's a very new instrument. We were the first ones to play on it. Clearly, it's an evolving structure and we just hope that there will be more people who enter the IDR market.

That will then have hopefully a more diverse set of issuers which will help the regulators form or evolve their thinking on this rule. As of now we are bound by the structure and the policies around the new instrument.

Q: Given that this has a material bearing on your stock, would it have been better to have this clarity at the time when you were doing this IDR issuance in the first place because the rules of the game have now changed for a few people after a few months of listing and therefore the stock has had a big impact. Would you not want to take it up with the Sebi because while it was mentioned in the prospectus, the clarity on this issue was not there when you were doing the issue?

A: Yes, we would have preferred to have several other things spelt out a little more clearly as well. We couldn't have the insurance sector participate which is the case even today. We didn't have this classified as securities for tax purposes which remains an issue. The fungibility was uncertain even then and now.

At least it's clarified on what ground its not happening or will happen. We are living through the experience of experimenting with a new instrument. As these things will evolve, it's as much a learning for the investor base as it is for ourselves, the issuer.

Q: Was there a genuine arbitrage between the IDR and the underlying, the shutting of which window might have led to this reaction? What is your reading of why the stock has reacted?

A: The irony is that it seems from the price behaviour that some people who were expecting to make a big difference on the convertibility because of the arbitrage and the pricing which should not be there in the first place in both the markets, in London and in Hong Kong.

Over time, Hong Kong has stabilized to be at par with London. We used to have the arbitrage in Hong Kong as well initially. We just hope that at some stage people will see that alignment.

Q: Two-way fungibility has also stopped which means you cannot purchase on London or Hong Kong and then deposit in the local IDR programme which would again make it less lucrative for some of your global investors to be participating in this IDR?

A: That is absolutely right. Absolutely.

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