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Tuesday, May 25, 2010

Some questions and answers about Standard Chartered's IDR issue - plus a few comments on the Sensex

What is an IDR?

Indian Depository Receipt (IDR) is a security instrument. The underlying security is the equity shares of an overseas company. IDRs are denominated in Indian Rupees and issued in dematerialised form. IDRs will be listed and traded on the Indian Stock market just like equity shares of Indian companies.

What is the necessity of an IDR?

Overseas companies are not allowed to list their equity shares in India as per current rules. IDR is a method by which Indian investors can invest in an overseas company's equity shares in Indian Rupees. It helps investors to get a share of the global businesses of overseas companies.

So far, American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) were issued by Indian companies like Infosys, Wipro, ICICI Bank to overseas investors. ADRs and GDRs are listed in overseas stock exchanges in their respective currencies.

Can't Indian investors invest directly in global stock exchanges?

They certainly can, up to a limit of US $200,000. Investors will need to open overseas bank accounts, dematerialised accounts, comply with overseas rules and regulations, and contend with foreign exchange fluctuations. IDRs allow an investment in India in Rupees with the limit that an individual IDR holder can't hold more than 5% of the IDRs issued.

What are the entities involved in an IDR issue?

Issuer company (Standard Chartered) - incorporated and listed overseas.

Domestic Depository, an Indian entity appointed by the Issuer Company and registered with SEBI, will issue IDRs to investors.

Overseas Custodian, an overseas entity appointed by the Domestic Depository, will hold equity shares issued to it by the Issuer Company on behalf of the Domestic Depository.

Registrar and Transfer Agent, an Indian entity provides services to IDR holders, the Issuer Company and the Domestic Depository. They will keep a record of the IDRs and handle investor grievances.

What will be the benefits for IDR holders?

They will enjoy the same benefits on a proportionate basis as share holders of the Issuer Company overseas, including voting, entitlement to dividends, rights and bonus issues, subdivision and consolidation of the underlying shares - subject to the laws in India.

Should small investors apply for this IDR issue?

It depends on each investor. The major plus point is the opportunity to invest in a large, well-managed, profitable foreign bank that makes most of its profits from Asia, Africa and the Middle-East with no exposure to sovereign debt. The offer is at a valuation that appears reasonably attractive as compared to Indian private sector banks.

There are two negatives. IDRs will not attract Securities Transaction Tax (STT) and therefore, will be subject to both short and long-term capital gains tax. Dividends received will also be taxable.

(Note: Ten IDRs will represent one share of the bank. A 5% discount to the discovered price will be offered to retail investors. The information source is Standard Chartered's pamphlet on IDR. If you have more questions, feel free to ask.)

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A few comments on today's Sensex movements:

Both the 200 day EMA and the 50 week EMA were broken on a closing basis. These moving averages are used in technical analysis as long-term trend deciders. Intra-day, the index moved below the 16000 level but short-covering ensured a close above 16000. A close below 15900 will be the proverbial last nail in the coffin.

It is possible that we may see a bounce upwards from the current level. At least a sideways consolidation between 16000 and 16700 can be expected before bulls capitulate.

But the velocity of the down move on increasing volumes, and the global sell-off may shatter any bullish hopes. Watch out for the next lower levels marked on the one year Sensex chart last Saturday.

A close below 15300 will open the door to a much bigger correction. With most global indices slipping into bear markets, the Sensex may be forced to follow suit in spite of the improving economic conditions.

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