In a move that will significantly enhance the free float in Indian equities available to overseas investors, sponsored American depositary shares (ADS) offerings worth about $2 billion from Indian companies and banks are expected to be in the market in the first half of this year. Top information technology companies such as Infosys and Satyam Computers and privately owned banks HDFC Bank and ICICI Bank have announced plans for their sponsored ADS offerings.
On December 8 the board of directors of New York Stock Exchange-listed Satyam Computer Services approved a $360 million sponsored ADS offering for March 2005. This will double the ADS available to overseas investors to about 20% of the company's equity capital. Ramalinga Raju, chairman of Satyam, said that the company had decided to increase Satyam's float in the ADS market because ?positive global trends towards offshoring have resulted in enhanced interest in Indian IT companies?. Indian IT stocks rallied sharply after the re-election of president George W Bush in the US, on hopes that the uncertainty about outsourcing to India had disappeared.
Under a sponsored ADS offering, local investors who own Indian shares in the company can tender them for sale. The shares are then converted into ADS and offered to international investors at a price that will be book-built. Given that the ADS of most Indian companies trade on Nasdaq or NYSE at a big premium to their domestic price, the rupee shares tendered by local investors could fetch them a windfall. In Satyam's case, the premium doubled to 40% over the domestic share price in early December.
IT in the vanguard
Information technology services companies and banks are leading the group lining up ADS offerings. Infosys says it will offer 16 million local shares to overseas investors in its second sponsored ADS offering. Bankers say this could be worth close to $1 billion.
On December 13, the board of ICICI Bank, India's second-largest bank, approved a sponsored ADS offering of up to 44 million Indian shares. Current regulations cap foreign investment in Indian private banks at 74% of equity capital, and the foreign shareholding in ICICI Bank is presently about 70.8%. The maximum number of Indian shares of the bank that can be accepted for conversion and sale as ADS in the offering will therefore be 3.2%; a higher number can be converted if more foreign investors tender their local shares, according to a senior official at the bank. Based on this, bankers reckon the offering could be worth $220 million to $400 million.
The board of directors of HDFC Bank approved in October an ADS offering of up to $300 million, and reports indicate that UTI Bank, a private bank in which HSBC holds a minority stake, could go for an overseas float of up to $150 million. Bankers also expect IT company Wipro Technologies to announce plans for an ADS offering soon.
Apart from imparting liquidity to their stock overseas, Indian issuers, particularly IT companies, are looking to attract customers in the US, the largest market for their services. ?An ADS creates the sort of visibility and level of comfort that potential customers look for when signing up an outsourcing contract,? says Ravi Kapur, head of equity capital markets at DSP Merrill Lynch.
Even as the weakness of the dollar against most Asian currencies, including the Indian rupee, is driving investors into Asian equities, India's strong domestic growth story this fiscal year has attracted a fair share of that inflow. India's capital markets received over $8 billion in foreign portfolio investment in 2004, the highest ever in any single year. Although most of this, about $7 billion, was invested in the equity market, foreign investment in the local bond market is growing.
The Indian government too has gradually increased the limit for foreign investment in local government securities, treasury bills and corporate bonds. In the last budget, the ceiling for foreign investment in the bond market was increased to $1.75 billion; and in early December the securities regulator announced a new limit of $2.25 billion that includes a $500 million investment limit for corporate bonds.
Even before the new investment limit for corporate bonds was announced, foreign investors rushed in to buy Indian paper, cornering well over $500 million. Amitabh Mohanty, a debt trader at asset manager Alliance Capital, says that there are risk-free arbitrage profits available by investing in Indian bonds. ?Even on a fully hedged basis, foreign investors can earn up to 150 basis points on one-year paper,? he points out. The securities market regulator is faced with a dilemma now, of having to get foreign investors to wind down their rupee bond holdings to meet its new limits.