Liberalisation and globalisation ushered in by the Narasimha Rao-Manmohan Singh duo in the early nineties meant, among other things, access to foreign retail and institutional capital through issuance of Global Depository Receipts (GDR) or American Depository Receipts (ADR) or Foreign Currency Bonds, participation of foreign institutional investors in the Indian bourses through the FII, later rechristened as the FPI route and participation by foreign Qualified Institutional Builders (QIB) in the Indian IPOs.
Quite a few Indian companies have issued their equity to foreigners for listing in foreign bourses through the ADR/GDR route. These are fungible in the sense they can be converted into their Indian underlying shares for trading in the Indian bourses and back into ADR/GDR for reverting back to trading in the foreign bourses where they are listed. Fungibility offers arbitrage opportunities. Foreign listing of course confers prestige but also comes in for microscopic scrutiny by foreigners. ADR/GDR thus is a double-edged sword. So much so, only 5 Indian companies have floated their ADRs and only 6 their GDRs.
Satyam Computers Ltd too had issued ADRs but it was the first and thus far the only one to meet with a bitter end when in 2008 the American investors voted with their feet when they suspected with reason that the books of the company were cooked. Itspromoter Ramalinga Raju had the gall to book fictitious orders and show exaggerated sales, and complete the double entry with forged fixed deposit receipts of an Indian bank. The echoes from the American stock market were felt in the Indian bourses soon enough thanks to the symbiotic relationship with its ADR and the underlying Indian shares. Boxed into a corner, Raju came up with a mea culpa. American shareholders successfully sued Satyam in a class action suit culminating in millions of dollars being paid to them as compensation even as the Indian shareholders were left holding the can. The government mounted a rescue and rehabilitation operation, and allowed the Mahindra group to take over Satyam — which rechristened it as Tech Mahindra both to align the name with its group name and to erase the bitter memories associated with Satyam.
Satyam was a chastening experience as it brought out the flipside if not the downside of foreign listing in prominent relief. While the Indian market allowed the grass to grow under its feet, American investors proved savvier and more vigilant with their ears to the ground. For company promoters it held out a somber and solemn lesson — don’t access foreign equity too readily. despite the fact that it is not repayable as is the case with External Commercial Borrowings (ECB) with the attendant exchange rate risk.
Fast forward to last week when Adani Enterprises and its conglomerate members were singed by the foreign connection. Unlike Satyam, Adani came to grief not because of dalliance with ADR but thanks to Hindenburg, a self-confessed short seller, circulating salacious details of Adani’s alleged wrongdoings including floating of shell companies abroad and indulging in round-tripping ultimately to bolster up the valuations in the Indian bourses of the conglomerate's shares to mindboggling levels. Hindenburg obviously didn’t have a lofty motive but a sinister one to trigger a selling wave in Adani bonds listed in the US so they could purchase the bonds cheap to square off what had earlier been short sold. Predictably it caused a selling wave of shares as well in the Indian bourses. To be fair to Adani, none of the lenders have complained of default but nevertheless the regulators have bestirred. This article, however, is not about L’affaire Adani rocking the nation but about the flipside of accessing foreign funds.
Satyam gave the first warning to the Indian companies that had sourced capital from abroad through ADR/GDR or bonds, not to trifle with foreign investors or try to pull wool over their eyes. Almost a decade and half later another grim warning has been served, albeit by a short seller with a sinister motive — foreign investors can trip you after having parted with their funds. But then it is not a story of unmitigated disaster. There are bright spots too. To wit, companies with foreign listings have better reporting records as American accounting standards are more demanding and afford little scope for window dressing especially after their own chastening experience with the Enron scandal. Moreover, ADR/GDR instruments beget permanent capital without rocking our forex reserves as they are not redeemable by the Indian companies issuing them, being equity instruments. In this respect, ADR/GDR scores over both FPI, which is the most footloose foreign capital, and External Commercial Borrowings (ECB). ECB beckons Indian companies with low interest rates but its downside is exchange rate risk — if you had borrowed US $ 10 million when the exchange rate was Rs 70 whereas it was Rs 80 at the time of repayment, it would have entailed a loss of Rs 100 million thus wiping out the savings in interest if the exchange rate risk was unhedged.
The best dalliance one can have with foreigners is FDI as it is not only non-repayable, being investment in equity in precious foreign exchange, but also brings cutting edge technology and provides employment to millions of Indians. Unfortunately, we missed the bus and China made the most of it. FDI is integral to the make-in-India pitch. Small wonder, when Air India placed the largest ever order for 470 aircraft on Boeing and Airbus, there was a wistful pining that it had come by way of FDI and not by way of imports. But then aircraft are not cars. While foreign car manufacturers eagerly set up shop in India, aircraft manufacturers would like to utilise their own production capacities back home to the hilt. That Tesla chose China to make itselectric cars annoyed India, but the fact remains that we have not pulled out all stops to make India the preferred FDI destination.
S Murlidharan is a freelance columnist for various publications and writes on economics, business, legal, and taxation issues
