DRs could boost capital flows to India

The renewed confidence in the Indian government’s ability to reignite economic growth and investment since September last year has led to increased inflows of foreign capital into the country’s stock markets.

The additional buying helped push the benchmark index above 20,000 points early this year, and after a dip in February and March, the market is again trading not too far from those levels. But that doesn’t mean everyone is investing. In fact, many international investors are put off by the registration requirements they have to agree to in order to invest in locally-listed Indian stocks and are choosing to stay away from the market altogether.

Others are using alternative means to get exposure to the country, such as index ETFs, participatory notes (P-notes), or the qualified foreign investor (QFI) scheme that was introduced last year. However, all of these come with their own hurdles.

Another option is to buy depositary receipts (DRs), which allow investors to add foreign equities to their portfolios on the same basis that they would buy a local stock in their domestic market — with the same familiar settlement, voting and dividend payment mechanisms. At the moment though, there are only a small number of DRs based on Indian stocks available, particularly to US investors. DR banks want to change that and are currently lobbying the Indian regulators to allow companies that are already listed in India to set up DR programmes without having to raise capital at the same time — a move that they say could attract billions of dollars of additional equity investments from US asset managers.

The regulators have reportedly been keen to listen to the DR banks’ arguments, but so far they haven’t responded to the lobbying, neither in words nor action. Some argue, though, that there is little reason for the regulators to say no to this in the longer term.

“It all goes back to India realising that it is starved for foreign capital and needs foreign capital to fund its current account deficit,” says Ranjit Rajamani, an analyst with The Boston Company Asset Management which currently invests in India through a combination of local market purchases and DRs. “The regulators have been doing a good job of coming around talking to us about the merits of investing in India and I certainly see them taking incremental moves like this to make India more investor friendly and make capital flow into India more readily.”

“There are two different ways of looking at this,” notes Randy Dry, a managing director in the institutional group at Thornburg Investment Management. “One, they relax the registration requirements to own local securities, or two, they broaden the availability of DRs. We would take either route frankly.”

To view the complete story, see the May issue of FinanceAsia magazine, available online to subscribers.