Infosys’ third sponsored ADR issue for 30 million shares will open tomorrow, what is to be seen is the likely acceptance ratio for this ADR issue and  whether the temporary liquidity crunch will lead to increase in the share price. 

 This is the third sponsored ADS and they are offering 30 million shares this time and if one looks at the RBI formula for acceptance, they do not take into account the number of shares that are tendered.The formula calculates the acceptance ratio by total shares held by the tendering investor divided by the total shares held by all the investors who have tendered their shares. So the number of shares that are tendered is not taken to account but the number of shares that are held are taken into account.

So based on that it is assumed that all the shareholders, apply for this sponsored ADS then the acceptance ratio will be around 6.3% and if 60% of the eligible shareholders apply then it will be about 10.5%. Not much can be expected from the investors  that is to apply for this sponsored ADS as the premium in the ADRs have been declining over the year.

Looking at the average ADR premium from lifetime average it can be seen that it has been declining over the year. From 2003 when the first sponsored ADS issue had come till date, it is 37%. From 2004 to date it is 34% and in 2006, the premium has declined to 14%. If you look at the yesterday’s USD 52 closing on the ADR then the premium is only about 10%.

There is no incentive for the shareholders to tender their shares. But it can be expected that some promoters are likely to tender these shares. If all 100% shareholders tender their shares, the promoter holding will decline from 19.3% to 18.1%. If 60% is tendered, then it will fall to 17%. Post this issue the ADR, as a percentage of equity, will go upto 19% and the free float of ADR part will go upto about 24%. So in all, a very strong response cannot be expected to the sponsored ADS.

But one needs to look at the liquidity crunch; if everybody tender their shares, whether it will impact the share price. In the past last two sponsored ADS issue, not much impact was seen in the first ADR issue. The issue had closed post three months, the share had gone up by 33%. But in the second ADR issue, this stock was up only 7% in three months after the issue had closed.

This was mainly because of certain fundamental reasons. In 2003, the company, in the second half, had increased their EPS guidance twice and in 2005 the EPS upgrades did not come. So clearly, fundamentals were guiding the share price. So on the historical basis, there is no case for whether the share price will increase when the shares are tendered.

Also, because the shares tendered are not taken into account for acceptance ratio. The number of shares going out of the market might not be that much. But the issue will definitely lead to the company being eligible for being part of NASDAQ 100, which is one of their objective for this sponsored ADS.