GDRs back in fashion

After a prolonged lull, the market for global depository receipts seems to have revived.

Mid-size companies, with an annual turnover of Rs 100-200 crore (Rs 1-2 billion), are rushing to cash in on the overseas pro-India sentiment.

Merchant bankers said many Indian companies realised it was easier to float a GDR issue overseas than to attempt a local float.

Moreover, raising resources through a GDR issue makes more sense for small to mid-size companies as promoters do not risk losing control over their companies or sharing it with bulk domestic investors.

Merchant bankers told Business Standard that they had got the feedback that the Indian public issue process was not only lengthy but also cumbersome.

For instance, one merchant banker said the local norms required a 60 per cent reservation for retail investors.

"To target that kind of base calls for tremendous marketing effort, which becomes costly for a mid-size company," he added.

But in the GDR market, the investors are mostly qualified institutional buyers (QIBs) to whom it is far easier to sell the issues.

According to market sources, at least seven to eight mid-size companies are expected to enter the GDR market next year.

Meanwhile, if control issues seal the argument between an overseas float and a domestic IPO, the choice between GDRs and an American Depository Receipt is heavily biased in favour of the former.

An ADR issue calls for too many disclosures and stringent quality checks. A GDR issue, on the other hand, calls for far less disclosures and documentation.

Market sources said there were two classes of companies planning to raise money through GDRs.

One class is of companies with plans to raise the equivalent of Rs 20 to 50 crore (Rs 200 to 500 million).

Then there are the others with amounts ranging between Rs 250 and 350 crore (Rs 2,500 and 3,500 million).

According to S Sriniwasan, vice-president and co-head investment banking services, Kotak Mahindra Capital Co Ltd, these companies are well run, with a track record behind them.

Here, the promoters are genuinely interested in issuing the securities and raising capital unlike in the former case where the funds requirement is so small that access to local funds diverts the company's attention.

The current boom in the domestic markets and the interest generated by Indian papers abroad has had its effect on Indian securities abroad as well. Companies are confident of getting good valuations.

Betala Roopchand, director, Strategic Capital Ventures told Business Standard: "Companies with a $100 million market capitalisation, with easy migration to US GAAP accounting and sound track record will go for a sponsored ADR issue to increase visibility in the US markets."