Study of the factors behind the post-issue performance of GDRs floated by Indian companies in the period 1992-98 : two case studies - ITC Limited and Core Healthcare Limited

Abstract

Core Healthcare went in for a GDR issue at a time when they were turning in astounding results. It was probably an ideal time for them to issue GDRs. The GDR route was chosen primarily because of the perceived low costs of raising funds. The lead manager %,.‘ as chosen on the bask of personal rapport. The price was decided through a partial book building process. The Core Healthcare figures in their GDR offer document were not recalculated according to UK GAAP. Also, the language in the offer document does not seem very clear regarding the projects they plan to invest in. Subsequently their financial performance deteriorated immensely with creditors even pressing for an exit of the promoters. This was reflected in their share as well as GDR prices. In fact, there were no takers for the GDR for intermediate periods. The share price on the domestic exchange shows a steep rise three months before the GDR issue and a steep fall four months after the GDR issue, thereby opening up the possibility of artificial management of-the prices. ITC had shown steadily good performance over the years before the GDR issue. The objectives of raising money through the GDR route were manifold; repayment of high cost domestic loans, funds for expansion, funds for subsidiaries and positioning ITC as a good investment option in the international financial markets. The lead manager was chosen for his marketing skills. The pricing was based on a firm offer price based on a discount to the prevailing domestic share price. The ITC GDR had a special feature of a warrant which gave an extra value of Rs. 63 per GDR. This increased the effective discount of the ITC GDR from 9 % to 19 %. Unlike Core Healthcare, the ITC offer document actually recalculated the financial figures according to the UK GAP. Also, the language of the offer document seems to indicate that they were sure about what they intended to do with the money from the issue. ITC's future financial performance improved steadily reflecting in its share and ( iDR prices. The GDR is now the best performing Indian GDR. The effect of the exchange rate change was quite striking in ITC. It turned out that had the exchange rate remained constant, the premium to issue price of ITC GDR would have touched 400 %. A study of the performance of the Indian GDR issues based on classification reflects that brands have performed better than commodities and Public Sector issues have fared better on an

average than the private issues. However the investors in issues made iii 1994-96 have lost more than those of the earlier issues. The fact that almost all the GDR issues are quoting at a discount to their issue price while most of these issues are quoting at their domestic price in Rupee terms leads us to believe that a significant portion of the discount to the issue price arises not out of the performance of the company or the performance of the Indian market in general but nut of a depreciation of the Rupee against the dollar, a factor which is out of the control of individual companies. The absence of two way convertibility has led to the increasing lack of liquidity in the GDR market. The continuing shrinkage of the market could lead to a collapse. A contributing factor to this is the improvement in the domestic settlement systems which provide an incentive for the overseas investors to convert the shares and hold them on the domestic exchange. The GDR market came up at a time when India was the flavor of the month. It was a good opportunity for Indian companies to raise funds. It was also a time when exchange rates were closely controlled by the RBI. Now, with lesser control by the RBI. development of better settlement systems on the domestic exchanges and the lack of two way convertibility, it appears that the GDR market has lost its This is however not true for really blue chips like ITC where the laws limiting holding on domestic exchanges force investors to look for other ways to take an exposure to these blue chips. The studies of correlation between the CiDR Index Value and the nest sense", values on the same day reveal that the movements on the GDR Index closely follow that of the Sense The absence of a time lag indicates that the foreign investors are using the information as efficiently and quickly as the domestic investors.