India allocations set to rise with new overseas listing rules

Incoming measures easing the regulation of depositary receipts could overcome the high cost of foreign direct investment, new research suggests. But foreign investors still face formidable challenges.
India allocations set to rise with new overseas listing rules

Indian companies are set to receive a significant financial boost from new measures that will provide greater access for foreign investors, according to a new report.

But while there has been understandable optimism about Indian growth, investors remain concerned about how to invest in the country.

US bank BNY Mellon has released details of a study conducted among 32 active North American firms with aggregate assets of $15 billion invested in India. The list of participants included many well-known asset management firms such as Alliance Bernstein, Caravel, Federated, Lazard, Macquarie and Oppenheimer.

Almost 70% of the respondents perceived investing in India as more difficult than any other emerging market, while 59% are restricted from directly investing into India via ordinary shares.

Their greatest complaint about India was how difficult it was to invest, especially with the amount of bureaucracy imposed by the Securities and Exchange Board (SEBI).

Many respondents pointed to the high cost of direct investment and challenges related to the process of registering with SEBI, to gain approval as a foreign institutional investor (FII).

According to Neil Atkinson, head of Asia-Pacific depositary receipts at BNY Mellon in Hong Kong, recent reforms to rules governing investment in Indian companies via depositary receipts (DRs) could substantially increase Indian exposures; 53% of BNY Mellon’s respondents claimed they will increase their exposure to India as a result of the new measures.

“Liberalisation could further integrate the Indian financial system with international capital markets and bring potentially significant new opportunities for investors outside India and India’s corporate issues,” says Atkinson.

DRs are traded on major stock exchanges, and in the US also on the OTC market. Currently the top two US-listed DR programmes by value are both Chinese: Alibaba and Baidu.

BNY Mellon has been lobbying for liberalisation of rules for foreign investors since issuing a paper in March 2013 entitled “Easing Conditions in India”. In December last year, SEBI issued new guidance on DRs, which Atkinson expected to be operational this month.

Particularly in India, investors agreed that DRs help their firms gain greater access, as they are able to consider a broader range of investment opportunities without local registration.

The new rules will allow sponsored and non-sponsored DRs to be listed. “This is good news for investors and provides real positive momentum,” said Atkinson. “Once the scheme is operational, investors will potentially be able to access all the companies of the Nifty 50 and a range of other Indian listings.”

Aligned with concerns about regulatory obstacles, investors are also mindful of the need for greater corporate governance and transparency. “They call attention,” Atkinson said, “to Indian companies with overly complicated corporate structures, such as cross-ownership and multi-level subsidiaries, that hinder investors’ ability to fully understand fundamentals and appropriately value the stocks.”

The survey respondents suggested that more Indian companies should consider pursuing DR listings in order to gain exposure to investors who face restrictions from trading locally.

As a secondary suggestion, investors asserted that Indian companies should encourage their government to implement open-market policies that reduced bureaucracy, eased the FII registration process, lowered transaction costs and lifted ownership restrictions.

Despite the fact that India was well-positioned to benefit from its attractive demographics and weakness in global oil prices, survey participants were concerned about currency risk, inflation and a widening current account deficit if the country’s economic revival was mismanaged.

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