Two ADS issues, two different fates
It has been almost a year since a large sponsored American Depository Share (ADS) issue hit the market. Recently, Infosys and Dr Reddy’s tapped the sponsored ADS market again, but both issues have met slightly different fates. ET decided to take stock of this mode of issuing equity abroad.
Dr Reddy’s Laboratories on Friday announced the pricing of its public offering of 12.5m ADS to raise about $200m at $16 apiece. The ADS has been priced offered at a 2.7% discount as compared to the company’s ADR closing price of $16.45 on Wall Street on Thursday and around 8% discount to the current price at the Indian bourses.
Infosys has announced that it intends to raise $1bn, but has priced its ADS issue in line with its current ADR price. This is close to a premium of around 12% to its prices on the BSE.
Investment bankers involved with the issues said that since both the companies are in different sectors and have a different profile with American investors, they had to price the issues differently.
US investors take favourably to Indian technology companies, especially those like Infosys, which adhere to a high level of corporate governance, and hence would not mind paying a premium over the price at which it is trading in India.
As for Dr Reddy’s, merchant bankers felt that the overseas investors may not be that gung-ho about an Indian pharma company and hence they might have priced it accordingly to entice overseas investors.
However in the long term, say for a company like Dr Reddy’s, it is not a bad development at all. As and when the liquidity in the Indian market decreases — because of conversion of local shares into ADRs — the price will correspondingly increase and this may have a rub-over effect on overseas stocks too. Besides, it is a long term play. The next time the company goes overseas to list its equity, it can command a better premium. Moreover, it actually depends on what the prices are on the last day when the shares can be tendered by investors/promoters.
When companies issue sponsored ADS, there is no fresh issuance of equity. Indian investors, promoters, or FIIs can tender their shares in when a company announces an ADR issue and the allotment is done proportionately. This is not same as a regular ADR issue where the company wants to raise fresh money by tapping investors abroad.
Companies which have large amounts of cash and a high percentage of floating stock (shares owned by non-promoters), issue sponsored ADRs to increase their visibility in territories where their products are sold.
In case of Infosys’ previously sponsored ADS, there has been a contraction in the ADS premium over the years, which was more due to the rise in domestic prices rather than a fall in ADS prices. An ICICI Securities report said that the contraction in premium was mainly on account of higher FII registrations in India.
This meant that investors would have sold the ADR and after getting the FII registration, would have invested in the stock here — thus leading to premium contraction. The report said that based on an extrapolation from the past, the ADS premium contraction will be caused by a rise in domestic price rather than a fall in the ADS price.
Dr Reddy’s Laboratories on Friday announced the pricing of its public offering of 12.5m ADS to raise about $200m at $16 apiece. The ADS has been priced offered at a 2.7% discount as compared to the company’s ADR closing price of $16.45 on Wall Street on Thursday and around 8% discount to the current price at the Indian bourses.
Infosys has announced that it intends to raise $1bn, but has priced its ADS issue in line with its current ADR price. This is close to a premium of around 12% to its prices on the BSE.
Investment bankers involved with the issues said that since both the companies are in different sectors and have a different profile with American investors, they had to price the issues differently.
US investors take favourably to Indian technology companies, especially those like Infosys, which adhere to a high level of corporate governance, and hence would not mind paying a premium over the price at which it is trading in India.
As for Dr Reddy’s, merchant bankers felt that the overseas investors may not be that gung-ho about an Indian pharma company and hence they might have priced it accordingly to entice overseas investors.
However in the long term, say for a company like Dr Reddy’s, it is not a bad development at all. As and when the liquidity in the Indian market decreases — because of conversion of local shares into ADRs — the price will correspondingly increase and this may have a rub-over effect on overseas stocks too. Besides, it is a long term play. The next time the company goes overseas to list its equity, it can command a better premium. Moreover, it actually depends on what the prices are on the last day when the shares can be tendered by investors/promoters.
When companies issue sponsored ADS, there is no fresh issuance of equity. Indian investors, promoters, or FIIs can tender their shares in when a company announces an ADR issue and the allotment is done proportionately. This is not same as a regular ADR issue where the company wants to raise fresh money by tapping investors abroad.
Companies which have large amounts of cash and a high percentage of floating stock (shares owned by non-promoters), issue sponsored ADRs to increase their visibility in territories where their products are sold.
In case of Infosys’ previously sponsored ADS, there has been a contraction in the ADS premium over the years, which was more due to the rise in domestic prices rather than a fall in ADS prices. An ICICI Securities report said that the contraction in premium was mainly on account of higher FII registrations in India.
This meant that investors would have sold the ADR and after getting the FII registration, would have invested in the stock here — thus leading to premium contraction. The report said that based on an extrapolation from the past, the ADS premium contraction will be caused by a rise in domestic price rather than a fall in the ADS price.
posted by SY at 4:03 PM
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