Blue chips’ foreign floats suffer from P-note blues

MUMBAI: A slowdown in FII inflows triggered by Sebi’s restrictions on P-notes has taken some sheen out of the ADR/GDR market. Depository receipts (DRs) issued by Indian blue chips like Reliance Industries (RIL), L&T, ICICI Bank, HDFC Bank and SBI have witnessed a substantial fall in premium enjoyed over their respective prices on the Indian bourses, reducing the scope for arbitrage between Indian and overseas markets.

Interestingly, most of these instruments had shot up to new highs within few days of Sebi’s announcement on broader guidelines on P-notes on October 25. This, according to merchant bankers, could be because P-note clients who were desperate to buy the India story opted to invest via the DR market.

The euphoria on ADR/GDRs, however, lasted only for some days as Sebi’s order to unwind P-note positions within 18 months and a ban on fresh P-note positions by sub-accounts caused nervousness among FIIs and P-note holders. FIIs have been on a selling spree, pulling out funds amounting to Rs 4,422 crore in the current month so far (till November 27).

While tracking trends in DRs of some of the leading companies, ET found that their prices gained substantially soon after the Sebi move even though, in India, stocks witnessed highly volatile movements. For instance, RIL’s GDR price rose 9.2% from $134.5 on October 25 to $146.9 on November 15.

It, however, lost some ground during subsequent days before ending at $141 on November 27. The fall in the DR price, in fact, converted premium of 0.5% into a discount of 3.5%. GDRs and ADRs are the instruments issued to non-resident Indians against the issue of ordinary shares. While the former are listed in the US, the latter are listed on European markets like London and Luxembourg stock exchanges.

SBI is another major example which saw a significant fall in premium in the past few weeks. From a high of $133 on November 2, the GDR price declined to $117, resulting in a steep fall in premium from 16% to 0.1%. The list of losers also included L&T, ICICI Bank and HDFC Bank, a few notable examples among prominent DR issuers.

Looking forward, there may be a slowdown in Indian DRs as liquidity will be affected in the absence of fund flows from P-note clients actively trading in these instruments earlier, say merchant bankers.