Friday, March 09, 2007
Paper on Indian ADRs
A Study of International Listing By Firms of Indian Origin, by Sudipa Majumdar [link]. The abstract reads: A growing number of companies from emerging economies are crosslisting their shares on international exchanges in their effort to access the developed stock markets. This paper tries to look into the inter-sectoral and inter-temporal characteristics in prices of such stocks of Indian origin that are being dually traded on the American and Indian stock exchanges. The trend up to August 2006 shows the existence of positive premia levels of the American Depository Receipts (ADRs) over the underlying domestic securities. In an effort to realign ADR prices and bring down premia levels, the Reserve Bank of India introduced two-way fungibility in February 2002. However, ADR premia levels continued to increase during the period 2002 to 2004, with a decline only from 2005 - this downward trend seems to be unrelated to the fungibility criterion since the two-way conversion did not open up arbitrage opportunities. We find that legislative changes in India had an impact on decisions of Indian companies to go in for international listings. However, once listed, the trading in ADRs by foreign investors was guided by movements in the US stock market rather than capital market activities in India. We do not find any increases in domestic stock prices across firms after their foreign listings, but the domestic stocks show an increase in trading volumes (liquidity gains) after their international listings.