How investors lost arbitrage opportunity on StanChart IDR

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How investors lost arbitrage opportunity on StanChart IDR

Investors who were hoping to profit from the difference in the price of the Standard Chartered stock (on London and Hong Kong bourses) and its Indian Depository Receipts(IDRs) have been caught unawares by the latest Sebi ruling on the IDR convertibility.

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Investors who were hoping to profit from the difference in the price of the Standard Chartered stock (on London and Hong Kong bourses) and its Indian Depository Receipts(IDRs) have been caught unawares by the latest Sebi ruling on the IDR convertibility. The stock market regulator has said that Standard Chartered need not convert the IDRs into the underlying shares, since there was enough liquidity in the IDRs.

The one-year lock-in for IDR holders was to end on June 11, making the IDRs eligible for conversion into underlying. But that will no longer be the case in the light of the Sebi ruling.

According to Sebi, a conversion would be possible only if the trading volume over the last six months was less than 5% (annualized) of the total IDRs issued.

The annualized trading volume in Stanchart IDRs over the last six months was 48.5% of the total IDRs in issue (around 24 crore).

Stanchart IDRs crashed to a 52-week low of Rs 91.90 early on in the session, down 20% over their previous close. At 11:35 am, they had trimmed some of the losses and were at Rs 99.10, down 13.6%.

The question now is whether Standard Chartered may have been hasty in going ahead with the IDR last year, when there was not enough clarity on the fungibility and tax aspects. A two-way fungibility means the IDRs can be converted into the underlying shares, and vice-versa.

"We would have preferred to have several other things little bit more clear as well," Jaspal Bindra told CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee, in response to a query on whether there should not have been clarity on the fungibility and tax aspects at the time of the issue itself.

Read the full transcript of Jaspal Bindra's interview here .

"Clearly we couldn't have the insurance sector participate which is the case even today. We didn't have this classified as securities for tax purpose, which remains an issue. And the fungibility was uncertain even then and now, at least it is clarified on what ground its not happening or will happen," Bindra said.

The steep fall in the IDR price seems to suggest that more investors were betting on arbitrage gains, rather than on the fortunes of the bank which emerged almost unscathed from the financial crisis that rocked the global banking industry in 2008.