Foreign institutional investors (FIIs) are at it again. They’ve started making a quick buck using the arbitrage opportunities between Indian and international stock markets.
American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) of Indian companies are trading at a 2-4 per cent discount to their domestic prices. As a result, FIIs are purchasing ADRs and GDRs abroad, converting them into local shares and selling them at a profit in the Indian market.
For instance, GDRs of Grasim Industries, Gas Authority of India (Gail), Mahindra & Mahindra, ITC and State Bank of India (SBI) — which trade on London and Luxemburg exchanges — are trading at a 2-4 per cent discount to their prices in the Indian market. Similarly, ADRs of ICICI Bank, Tata Communication and Infosys Technologies are available at a discount of 1-3 per cent.
Market experts said that while this signalled a weakening sentiment towards Indian stocks, it has also opened a window of opportunity for FIIs to make a quick buck.
Gautam Chand, CEO, Instanex Capital, said the selling pressure in the liquid depository receipts (DRs) was largely due to a sharp rise in domestic share prices after the election results.
The first signs of this arbitrage opportunity were noticed in October 2008, when DRs of ICICI Bank and SBI started trading at a discount abroad. This allowed FIIs to make the most of the opportunity. This trend continued till March.
Post-March, both global and Indian markets recovered quite sharply. However, the rate of growth in the Indian market was much faster than other world markets, thereby reducing arbitrage opportunities for FIIs. But in the last two weeks, these opportunities have risen almost to the pre-March levels.
The Bombay Stock Exchange (BSE) Sensitive Index, or Sensex, rose 27 per cent between May 15 and June 10. In comparison, other world indices rose between 5 per cent and 11 per cent in the same period.
Even now, while world indices are still hovering around their May 15 levels, the Sensex is up by 18 per cent.
The conversion of DRs into local shares is clearly seen from the decline in custodians’ holdings in depositories. SBI’s GDR holdings has dipped more than 2 percentage points from 6.46 per cent to 4.27 per cent between October 2008 and March 2009. For Gail, ICICI Bank and L&T, the holdings have slipped by 1 percentage point each.
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