INDIA's FIRST IDR: THANKS TO STANDARD CHARTERED BANK PLC.

STANDARD CHARTERED BANK PLC

Standard Chartered PLC (STAN: LN) Bloomberg is all set to be the first foreign company to list in India through an Indian Depository Receipts (IDR) issue. India is the most profitable unit after Hong Kong. StanChart as it is called in short will offer to sell 24 crore IDR’s through public issue on May 25th 2010.

The issue will be 10 IDR = 1 share of Standard Chartered Plc of US$ 0.50. Like Global Depository (GDR’s) & American Depository Shares (ADS’s), IDR are the derivative instrument with shares as the underlying asset, they allow foreign companies to raise money in India.

StanChart expects to raise $500-$750 million (Rs 2250-3375 Crs). Calculation shows that an issue price of Rs 105-115 per share. This will be Stan Chart’s 3rd listing after London & Hong Kong & its next stop is Shangai.

StanChart is in India from 1858 in Kolkata; here it has 94 branches across 37 cities with over 20 lakh customers. It wants to show its commitment towards India which contributes 12 % of its global revenues. StanChart’s Net Profit grew 30 % CAGR in last 3 yrs, while Profit before Tax grew by 38 %. Base on 2009 results, StanChart’s Price to Book = 2 times, much better than 2.5 times of SBI. P/E at 14.6 times v/s 15.7 of SBI & 29.4 of HDFC Bank. Price band will be announced by May 24th 2010 depending on the closing price of the shares listed in UK.

What does IDRs means to an Indian sharesholders in terms of Taxations.....

Like Global Depository Receipts (GDR’s) & American Depository Shares (ADS’s), IDR are the derivative instrument with parent companies shares as the underlying asset, they allow foreign companies to raise money in India. An IDR holder acquires the same rights as a shareholder, except that he/she can neither attend the AGM nor vote on resolutions. NRI’s can trade in the IDR’s.

The biggest question doing the rounds is – what could be the tax implications for the Indian IDR holder? The good news is that IDR does not come under the purview of Securities Transaction Tax. But the IDR holder will have to pay tax on the dividend income earned. It is not yet clear whether the tax payable would be equal to the Dividend Distribution Tax which for the current fiscal stands at 16.61%. So tax seems sure but the rate is yet unsure.

Then there is the question of short and long term capital gains tax?

Currently, Long term gains made from Indian Stock Exchanges (stock held for more than 12 months) is completely exempted from tax while Short term capital gains tax (held less than 12 months) stands at 15%. But the IDR does not fall under the STT, so maybe it will not enjoy the same benefits as the shares listed on the Indian Exchanges enjoys. So this means that IDR’s will be taxed like any other asset –long term tax- held for over 36 months would be around 20%. Short term tax, when asset is held for less than a year, will be like regular income earned, at 30.9%.

There is no real clarity yet on this treatment of tax but surely, the Govt will have to bring a notification soon. A quick resolution on the tax angle is urgent and imperative or else it could undermine the very lure of this IDR.

According to the red-herring prospectus, the legal regime for IDR’s is still to be tested; investors in IDR’s may not get the benefits of a bonus issue or a rights issue; Even dividend income on IDR’s will be taxed in the hands of the investors and long-term capital gains tax will be another additional burden. Standard Chartered Bank has said whenever the company and/or the depository is unable to make bonus issues or rights issues available to the IDR holders, the depository will try and sell the deposited property that is the subject of the distribution on behalf of the IDR holders and distribute the net proceeds thereof as a cash distribution to the IDR holders.

Standard Chartered said it has agreed that for all corporate actions including voting, rights issues, the payment of dividends and other distributions, it will treat IDR holders on an equitable basis vis-à-vis other holders of shares in the home country (the UK). However, it pointed out that in circumstances where certain corporate actions, which are available to the holders of shares in the home country of the company and other jurisdictions where its shares are listed, are not permitted by Indian laws to be offered to IDR holders.

There is also a term called "Fungibility", now what does this means & how it relates to IDR/ADRS ?

The actual meaning of the word fungible is the ability to substitute one unit of a financial instrument for another unit of the same financial instrument. However, in trading, fungibility usually implies the ability to buy or sell the same financial instrument on a different market with the same end result.

Its a financial instrument (i.e. individual stock, futures contract, options contract, etc.) is considered fungible if it can be bought or sold on one market or exchange, and then sold or bought on another market or exchange.

For example, if one hundred shares of an individual stock can be bought on the NASDAQ in the US, and the same one hundred shares of the same individual stock can be sold on the London Stock Exchange in the UK, with the result being zero shares, the individual stock would be considered fungible. There are many fungible financial instruments, with most popular being individual stocks, some commodities (e.g. gold, silver, etc.), and currencies.

Fungible financial instruments are often used in arbitrage trades, because the difference in the price (the arbitrage part) often comes from a difference in location (the fungible part). For example, if the Euro to US Dollar exchange rate was 1.2500 in the US and 1.2505 in the UK, an arbitrage trader could buy Euros in the US, and then immediately sell Euros in the UK, making a profit of 0.0005 per Euro (or $5 per €10,000), because Euros are a fungible financial instrument. Similarly it implies to Stocks IDRs etc.