SEBI is at it again, this time suggesting a possible merger of Indian Depository Receipts (IDRs) and delisting schemes at its 4 August board meeting.  In the words of the regulator: "Some multinational companies with listed subsidiaries in India are exploring the possibility of delisting their shares through an exchange offer." 

SEBI’s statement followed the first IDR issue by Standard Chartered making the foreign bank the first to list on the NSE or BSE.{source}
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CNBC TV18 The Firm’s Menaka Doshi sat down with Amarchand Mangaldas managing partner Cyril Shroff and JM Financial MD and co-CEO Atul Mehra to consider the implications of this possible development.

Shroff was quick to question the motivation, asking whether a scheme joining IDR with delisting regulations was meant primarily to facilitate delisting or to promote IDRs.   When questioned by Doshi, Shroff revealed his opinion that such shift in policy should be focused on IDRs with delisting a secondary objective.   According to Shroff, focussing on delisting as the primary motivator may imply the creation of a special regime.  Unlike multinationals, domestic companies do not have the ability to issue IDRs and therefore cannot avail of any delisting benefits.  

Mehra expressed doubt that Indian companies would complain that such scheme was discriminatory and focused his argument instead on the positive benefits on the capital markets.  Still, Mehra seemed to implicitly agree with Shroff by stating the objective of such scheme should be to get more IDRs into India, either through the process of delisting or through the fresh issue of IDRs.  

Shroff pointed out SEBI’s comments are probably addressing problems with companies already in the delisting territory because they are in violation of the 25 per cent public float rule.  

Mehra furthered this point by acknowledging that delisting creates a vacuum in the market as foreign companies eye a pull-out once they violate the 25 per cent public float rule.  This puts at risk the estimated 8 per cent market capitalisation constituted by multinational corporations.  Mehra noted that the proposed merger of the IDR and delisting schemes addresses such void. "What you do is instead of just giving cash in the hands of investors, you are giving them a surrogate paper at least to trade with," he said.

If adding a share swap on the back of a delisting helps the Indian investor by giving it an instrument on which to trade, the possible negative implications must also be considered.  Such development undoubtedly gives the domestic investor value, however, does it simultaneously expose it to greater risk?  We can look to Shroff’s comments for guidance that the IDR itself exposes the Indian investor to international risk and regulatory regimes.  

However, Mehra stated: "You are not exporting the market, you are importing the market or at best you are able to attract more and more companies to come into India."

Another issue is valuation.  Doshi noted that the current reverse book-building process is contentious with valuation being influenced by the minority squeeze out.  Thus, any development adding an IDR factor leaves valuation problems as the primary issue to be ironed out.  

According to Shroff, you can’t use the same valuation method for pricing IDRs and instead need an alternative method that lies for example on shareholder approval with a band within which the price is actually fixed.

Doshi added an interesting point that hidden in such equation is an implied value being ascribed to the Indian subsidiary in the eyes of the international parent corporation.  

Unless we want to expand the ability of foreign companies to determine the worth of the domestic market, SEBI must carefully create a valuation method if the development is turned into law.  Under the current framework IDRs and delistings are viewed as separate monsters.  

Bridges must therefore be built if SEBI proposes to unite the two regimes, agreed the panel.

Click here for a full transcript of the show, which was first aired on Friday 13 August 2010.

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