>STAN C – IDR (Eyeing Fungibility: Few thoughts)

Background
STAN C issued IDR (first of its kind) in June 2010 with a 100% fungibility post one year (IDR used to trade at an average discount of 5% to its PLC). After one year, SEBI introduced a clause that fungibility will be permitted only if IDRs are infrequently traded. Consequently, IDR hit a lower circuit of 20% and spread widened to a discount of 60% in the next four months.


In the recently concluded budget, finance minister made a fresh announcement that IDRs will become fungible subject to a ceiling. STAN C IDR hit upper circuit of 20% and the discount narrowed down to 25%.


Current status
FM has asked SEBI to draft the guidelines for fungibility and further SEBI is taking feedback from the industry. SEBI conducted a meeting with IDR holders, custodians, regulators and market experts to take view on the same. Broadly, the feedback was towards giving 100% fungibility.


Regulators need to create a good example out of STANC IDR that will encourage other foreign companies to issue fresh IDRs. There is likelihood of Vodafone, HSBC, and Citi taking the IDR route to tap Indian markets. The market is awaiting the comment/circular from SEBI on IDR fungibility guidelines. An outcome is expected within a month or two.


What will cheer the market?
In the light of FM announcing a two-way fungibility for IDR, we expect SEBI to draft guidelines in favour of IDR holders. The optimal structure would be allowing 100% fungibility, which will narrow the spread and may result in no need for conversion by holders. This will aid retention of equity on domestic bourses and narrow discount. Currently, insurance companies are not allowed to participate in IDR. If allowed, participants will increase in the IDR market.


What will disappoint the market?
Options like partial convertibility# or limit conversion should not be implemented, since it will neither do any good to investors or to foreign companies who wish to tap Indian market via IDRs. Instead, it will strain the counter as conversion will be at the maximum level (majority of the holders will opt for conversion).


Recommendation: ACCUMULATE
Current discount of STAN IDR to PLC is ~40% and, as mentioned above, we believe SEBI guidelines will be drafted in favour of fungibility. We recommend accumulating the stock at current market price.


Risk stems from the fact that if the partial fungibility clause is emphasized, then the current discount may expand or will persist.


To read report in detail: IDR