Month: May 2010

I wrote about the Standard Chartered IDR yesterday, and I thought I’d supplement that post with a little more detail about IDRs, since this is the first IDR ever, and there will probably be many more to come in the future.

What is an IDR?

IDR stands for Indian Depository Receipts, and Standard Chartered is the first company to come out with an IDR. StanChart derived 12% of its income from India in 2009, and India contributed $1.06 billion of its $7.23 billion operating profit last year, and that may have something to do with this first.

An Indian Depository Receipt is a way for a foreign company to raise money in India. The foreign company deposits its shares with a custodian, and then the custodian issues depository receipts based on these shares. To that extent, IDRs are derivative instruments because they derive their value from the underlying shares. In this case, Standard Chartered Bank, Mumbai is the domestic depository, and it has appointed Bank of New York, Mellon as its overseas depository.

Dividends related to IDR

For this particular issue, 1 IDR stands for one-tenth of a share, and any dividend declared by Stan Chart will be apportioned according to your IDR holdings, and distributed to you by the depository.

The same is true for Rights issues also. If Stan Chart announces a rights issue, you will have rights, similar to stocks, and there will be a price set in Indian rupees that you can pay to get into such issues.

If you are interested, then you have voting rights too, but there is no such thing as a tenth of a vote, ten IDRs will count towards one vote, 20 as two, and so on and so forth.

Taxation related to IDR

This is an interesting aspect because as I understand it, the current tax provisions put IDRs at a distinct disadvantage when compared with other common stocks.

For starters, dividend tax will be assessed at 30% (plus 10% surcharge) on all the dividends you get from these IDRs. Investors don’t need to pay any dividend taxes on other common stocks in India. The dividend taxes are paid by the company itself, and then the investor doesn’t have to pay any tax on it.

Next up, short term capital gains. On Indian stocks, the short term capital gains is charged at 15% plus surcharge, however in the case of IDRs, the short term capital gains will be charged at 30%.

Similarly, there are no long term capital gains on stocks in India, but in the case of IDRs – investors will need to pay a 20% long term capital gains plus 3% surcharge on IDRs.

That is a pretty significant hit right there, when compared with other stocks. There is one important point relating to these taxes, and that is the Direct Tax Code, which is expected to be implemented next year. That will change a lot of things, and by the time you think about selling these IDRs, the tax situation might look completely different.

The other thing about this is that these IDRs will not attract any Securities Transaction Tax (STT), which is a good thing, but my guess is that it isn’t that big a deal.

If someone has a different understanding, is an expert in this area, or just has an opinion – I’d love to hear your views about the tax implication on IDRs.

Listing gains related to IDR

This is another interesting aspect related to IDRs. The way they are being sold is quite similar to an IPO, and most Indian investors interested in IPOs are looking to cash out in the first few days of listing, and hope that the IPO lists at a significant premium to the issue price.

I don’t think this is going to be the case for IDRs because the company already has stock trading in other markets (in Stan Chart’s case – UK and Hong Kong), and there are players like hedge funds who will arbitrage on the price difference in the various markets and make sure the IDR doesn’t run away in price. Unless something happens that influence the stock price between the issue time and listing time, there may not be much in the way of listing gains.

So, there you have it, a summary of the important points of IDRs. For now, I think the tax implication is the most important when thinking about investing in IDRs, but that will probably change in the next few months with the Direct Tax Code kicks in, and the playing field levels out.

Update: Soon after I published this post I saw that Business Standard reports that the IDR will be priced between Rs. 100 and Rs. 115, and BL has a good article about this IDR as well. I think you should read those two stores instead of spending more time here.

I was going through the NSE website today, and saw the Standard Chartered Red Herring Prospectus there for an IPO that is going to come out on May 25th and close on May 28th.

Standard Chartered is going to issue 240 million Indian Depository Receipts (IDR) with every 10 IDRs representing one share of US $ 0.50 nominal value. The prospectus states that the basic EPS for a 50 cent share has been Rs. 78.38 in 2009, so for the IDR, the EPS to be considered would be Rs. 7.83. In 2008 the EPS was Rs. 89.67, and it was Rs. 82.16 in the year before that. Just for reference, I did a quick check on SBI P/E on Bloomberg and saw that it was 12.28. The prospectus itself states the industry composite P/E as 16.77. The price band has not been declared yet, and I will update this post once it is declared.

As is becoming the norm – there is a 5% discount for retail investors and employees on this issue.

Standard Chartered has two business divisions: Consumer banking and Wholesale banking, and here is a brief on what these divisions do from the prospectus:

Consumer Banking products and services include banking services, deposit-taking services, credit cards, personal loans, mortgages, auto finance and wealth management services. Major markets include Hong Kong, Singapore, Malaysia, Indonesia, South Korea, Pakistan, India, Taiwan and the UAE. Principal customers of the Consumer Banking business are individuals in Asia, Africa and the Middle East. In addition to serving individuals, Consumer Banking also offers a range of deposittaking, trade, lending and other banking services to SMEs. As at 31 December 2009, the Group has approximately 1,700 branches and 5679 ATMs operating in more than 71 markets. These are a key part of the distribution network for its Consumer Banking business. Wholesale Banking provides a wide range of solutions to help corporate and institutional clients facilitate trade and finance across some of the important growing markets and trade corridors in today’s global economy.

The Wholesale Banking structure, bringing Corporate and Institutional Banking and Global Markets under one management team, provides customers with an efficient level of service and promotes the cross-selling of products and services to customers through the Group’s emerging market network in Asia, Africa and the Middle East. This is complemented by a sales origination platform in India, the UK, the US, Australia and Japan. Wholesale Banking customers include multinational and large local corporations, banks, other financial institutions and, particularly in Hong Kong, India, the UAE, Singapore and Malaysia, medium-sized local companies.

I will update the post with more details when the pricing is out.