Mumbai, Aug. 17: American and global depository receipts – the securities that India Inc used extensively in the nineties to bankroll their expansion plans in the first flush of liberalisation — may fly once again with the government planning to relax pricing regulations soon.

The move to change the wrules has been prompted by a reality check after this year’s sharp downturn in the stock markets.

The finance ministry and capital market regulator Sebi are planning to shorten the time period for calculating the floor price for these securities.

At present, the minimum offer price for American depository receipts (ADRs) and global depository receipts (GDRs) is calculated after working out the average of the weekly high and low of the closing stock prices on the domestic bourses over a period of six months. The finance ministry has now decided to trim that period to two months.

The starting point for making that calculation is known as the relevant date — and even here the government plans to redefine it. At present, the relevant date is taken as 30 days prior to the date on which a meeting of shareholders is held to clear the proposal.

The finance ministry now wants to redefine it as the date on which the board of a company passes the resolution for the proposed issue.

The surge in interest rates after several banks raised their prime lending rates recently has prompted companies to start scouting for ways to raise cash — and the government is looking to make it easier for them to explore options that are no longer viable under the old regulations.

Recently, Sebi shaved off the time period for domestic preferential issues to qualified institutional placements and rights issues to shareholders to two weeks from two months earlier, sparking speculation about a flurry of such issues.

Clamour for change

Companies have been complaining that in a falling market, the current norms for ADR and GDR issues work to their disadvantage. As the price is fixed over a longer period of time (six months), the floor price for the ADR or GDR issue usually works out to be higher than the current market price.

This depresses the demand of investors for the depository receipts, who find it cheaper to buy the stock on the domestic markets.

Two other factors depress the market for ADR and GDR issues. The first is that they are not easily fungible, which means they can’t be immediately converted into the underlying stocks. Second, as the gloom spreads through the world markets, the Indian ADRs no longer enjoy the high premiums they once enjoyed over the domestic stock prices.

Need to do more

Companies with fairly large market capitalisation have favoured the ADR market. Smaller companies tend to access the GDR market.

There were three large ADR issues last year including ICICI Bank which raised over Rs 10,000 crore — one of the largest ADR issue. Others include Sterlite and HDFC Bank. But since then, there have been no ADR issuers.

The GDR market saw a boom last year with over Rs 11,000 crore raised. In the first four months of 2008-09, it’s down to a piffle at just over Rs 1,000 crore.

Experts are not certain that the changes in the pricing regulations will be enough to reignite the torpid market for overseas flotations this year.

“Companies will benefit from the relaxations in the pricing restrictions. I expect a slight increase in the number of those that want to list overseas,” said Gautam Chand, CEO of Instanex Capital, which closely tracks developments in the ADR/GDR market. Chand, however, said more modifications were required. He suggested that the regulations should distinguish between liquid and illiquid companies.

In the case of liquid companies, the floor price for pricing of the overseas issue should be the weighted average price of the shares for five days preceding the pricing of the issue. In the case of illiquid companies, it should be higher than the weighted average price of five days and it should also include other parameters that include return on net worth, and book value vis-à-vis the industry average.

Others feel that the markets have been very volatile recently. In the near term, companies may not find it opportune to float these overseas issues because the average of the highs and lows over a period of two months may lead to a price floor that is considerably higher than the current market price of the stock.