“Conversion of Equity Shares to Sponsored ADRs: An Advantages of Market Premium to Shareholder”

by

Rakesh Kumar Srivastava

Asst. Professor (Finance), MBA Department,

United Institute of Management,

Allahabad

Contd. from the previous issue…

A Case of Infosys:

Infosys was the First Indian Company to take advantage of the changed procedure and able to offer more shares to its overseas investors without actually issuing fresh shares. Allowing a strategic investor to invest in a company through a sponsored ADR issue is a good strategy, a win-win situation for both investors and company. Investors would get a good price and the company gets a strategic partner without diluting its equity. Gas Authority of India Limited (GAIL) was the first company in 1999, to allow British Gas to pick up part of the government stake, around 6% through GDR issue. In November 2002, promoters of Patni Computer sold their stake in the company through an ADR issue to venture fund company General Atlantic Partners. ADS offerings with its complex formula for proportionate allocations favoured large shareholders mainly.

            In a sponsored ADR Indian shareholders hand over their stocks for converting it into ADRs and selling it in the US market. An Indian investor then earns the price differential. Many of the Indian ADRs are quoted at a premium. Perhaps that is the reason Indian companies are planning to do a sponsored ADR (ADS).

            On February 18, 2005, Infosys ADR was trading on NASDAQ at $72.8. Simultaneously, in India, it was available at Rs 2,174. Given an exchange rate of Rs. 43.8 per dollar, the ADR should have quoted $50 approximately to eliminate arbitrage. Two things explain the price differentials. One, official barriers prevent foreign investors from buying the shares trading in India. Two, Foreign investors might attach a premium to Infosys because its returns are negatively correlated with other assets held by them.

Table1: NASDAQ Listed ADRs Issues of Infosys

Source: Prime Data Base, till April 2006, Bank of New York, (www.adrbny.com /20.02.07)

* % of share in the form of ADRs as on March 31, 2007

Note: Total 14 different companies, 25 issues of ADRs; out of that 03 are converted from GDRs

Table 2: Infosys First ADRs Issue - March 1999

   Source: Prime Data Base, Multinational Financial Management- Madhu Vij, Excel Books Ist Ed. 2001

Infosys subsequently converted its Equity Shares into ADSs

i. First Sponsored secondary ADSs: July 31, 2003

Sponsored ADR served as an effective tool for large shareholders, promoters and large institutional investors to offload a small percentage of their holding and collect the premium in NASDAQ over BSE through arbitrage opportunity. The inherent structure of the ADS conversion programme favoured the large investors though the issue is open to all.

 Infosys was the first company in completing a sponsored ADR programme. Domestic holders (who agreed to sell their stock for conversion to ADR) obtained a price of $49 per ADR equivalent to a 26% premium over domestic price. The underwriter fixed the offer price, based on the book value and the price of its ADSs, quoted on the NASDAQ. [2] The floating stock in the US market that had gone upto 8% from 3.2% in the NASDAQ and so to increased liquidity, visibility among US investors, image of global brand and took advantage of the premium on the NASDAQ over BSE. As, on December 07, 2002, Infosys was at $68.52 on the NASDAQ and on BSE, at Rs 4533/- equal to $94, with arbitrage opportunity. This could have been covered via the sponsored ADR, and in turn enhanced domestic shareholder value.

            Had the ‘acquisition currency’, to expand in German market” and provided broad-based revenue was the main objective. Stock swap was an option for corporate or product acquisition, rather than paying the consideration in cash, paid in form of ADR/GDRs. During 2003, the average contribution of revenues from US for Indian IT Company was around 60%. While the share of revenues from Germany, was around 2%, the third largest economy in the world and had the largest IT-spend in Europe.  

Table 3:  Infosys' First Sponsored Secondary ADRs Issue- July 31, 2003

Source: Prime Database – Prospectus dated July 30, 2003, Infosys Technologies Annual Report: 2003-04

Rupee gained 10 paise against $ on August 7, 2003, reached at 45.95/96 to the dollar, a level not seen since September 19, 2000.There was a remittance of $284 million through ADS receipts by Infosys.

ii. Second Sponsored secondary ADSs:  May 2005

To make it to the NASDAQ 100 required a $1 billion market capitalization and at least 10% float. Sponsored secondary ADS issue (converting over 5.78% of its total capital, 16 million shares, into ADS) made the 14% float and liquidity. Create a global company with global employees, global customers and global investors, and built brand equity among the mainstream companies on the NASDAQ.

Infosys wanted Japan to be a part of the transaction enabled them to build a brand in the 2^nd largest IT services market in the world. Infosys in its sponsored US $ 1 billion ADR issue, made a POWL (Public Offer without Listing) in Japan, under which its stocks, without an official listing procedure, were offered to Japanese institutions and retail investors.

Table 4: Sponsored ADRs Issue-May 2005

Source: Infosys Technologies Annual Report: 2005-06, Economic Times ND- 26.05.05

Infosys price jumped $3.39 i.e. 4.9%, to $72.14; and volume ranked no. 2 on 26.05.05 trading on NASDAQ after the issuance of secondary offering in the US. 

iii. Third Sponsored secondary ADSs:  November 2006

Infosys concluded its 3^rd sponsored secondary ADS on November 21, 2006, converted 30 million local shares into ADS at a price of $ 53.50 per ADS, and through the offer exceeded $ 1.6 billion in size. The issue increased US market cap of Infosys to $ 5.91 billion. The issued price at $ 53.50 per ADS was at a discount of 3.2% to NASDAQ closing on November 6, 2006, and a premium of over 6% to BSE closing on November 7, 2006 of Rs. 2,252. It was a strategic intent of Infosys to enter into the group of NASDAQ 100. The issue was oversubscribed by over three times.

* Rakesh Kumar Srivastava, L.L.B., MBA (Finance),

Asst. Professor (Finance)

MBA Department,

United Institute of Management,

A-31, UPSIDC Naini Industrial Area,

Allahabad

Email: rakeshkrsrivastava@yahoo.co.in,  drrakeshkrsrivastava@gmail.com

Phone No. 91-532-2500625/ 09450582025/09335104074

Brief Profile:

With an experience of over 6 years of teaching and research, pursued research in the area of International Finance, from School of Management Studies, Motilal Nehru National Institute of Technology, (MNNIT), Deemed University, Allahabad, submitted. Has served the SMS, MNNIT as a UGC’s Research Fellow in a Major Research Project of UGC, and presently working as Assistant Professor Faculty of Management Studies, United Institute of Management (affiliated to U.P. Technical University), Naini, Allahabad.

To his credit, have a number of research papers as an author or co-author on various contemporary issues relating to management studies, especially in the area of International Finance, Foreign Capital etc have been published. Few of the issues covered are; FIIs Inflow in India, External Commercial Borrowings & National Debt Management, FDIs and ADRs/GDRs/FCCBs. Has participated in number of international conferences/National Seminars and workshops and FDPs/QIPs.