Euro Issues and ADRs

In 1993-94 and 1994-95 a record number of euro issues were issued. Indian companies raised Rs 14,500 crore trough euro issues in these two years. India became the only country to have the unusual distinction of the largest number of GDR issues. However, in the subsequent four years, there was a lack of interest in Indian equity overseas. The Indian corporates also postponed their plans of raising funds from abroad due to the South East Asian crisis and Pokhran blasts.

The year 1999 can be regarded as a watershed year as Indian companies for the first time, raised equity from the Wall Street. Infosys Technology was the first company to tap the American market in March 1999, followed by ICICI and Satyam Info way. Infosys Technologies and Satyam Infoway are listed on NASDAQ while ICICI is listed on New York Stock Exchange. Satyam Info way was the first Indian company which tapped this overseas market even though it was not listed on any of the Indian stock exchange.

In 1999-2000 Indian firms raised $1 billion and in 2000-01 around $4 billion through ADRs, making them Asia’s biggest issuers of ADRs. This capital raised from the overseas market was greater than the total equity mobilization from the domestic market through public issues. Investors responded favorably to the Indian ADRs due to the high growth potential of Indian knowledge based firms such as information technology, pharmaceuticals, biotechnology and others. had become the first dot com company to list at a near 100 per cent premium on NASDAQ bypassing the BSE. With $8.6 million in accumulative losses, it could not meet SEBI’s strict criterion of a three year profitability track record. Indian companies go in directly for ADRs without domestic offering because the scrip appreciates more in the US markets as the concept of futuristic stocks is stronger in the US.

Indian Companies Prefer ADRs: ADRs are accessible to only good companies with high transparency and good governance practice which also benefit the local investor; this gets reflected in a higher P/E ratio. Many good companies have expressed their intention to raise capital through ADRs due to sluggish primary market conditions. Companies are attracted towards raising ADRs as they are free to decide the deployment of funds either in the US or in India. Companies can also make their presence felt in the global arena which would result in increased liquidity of the company’s stock. This would also further broaden the mergers and amalgamations financing capabilities of the company. Moreover, an ADR issue creates a currency for issue of dollar denominated stock option to employees, thereby enabling the company to hire and retain the best human resources.

The primary market is in a depressed state. Some unsustained spells of buoyancy were witnessed in 1994-95 (financial sector IPOs), 1999-2000 (IT boom) and the latest in 2002 with I-flex, Punjab National Bank and Bharti Tele-ventures raising Rs 1,200 crore from the Indian primary market. During the financial years 1994 and 1995, more than 1,000 IPOs were floated in the Indian primary market. However, since 1997, this number had fallen to fewer than 100 annually. In the year 2001-02 only six equity issues aggregating Rs 860 crore were floated by the private sector.

The US government has made listing norms more stringent in the wake of the recent spate of accounting scandals. Many Indian companies will find it difficult to raise funds through ADRs. These companies will have to tap the domestic primary market to raise funds.

A considerable amount of resources has been raised from the international capital market rough GDRs/ADRs. Good companies through good corporate practices and governance have been successful in getting themselves listed in the LSE, NASDAQ and NYSE. But the domestic retail primary market, the sluggish primary capital market can be revived if these blue chip companies raise a part of their resources from the domestic market.