Hooked, Lined And Sunk

IT started with ICICI’s US $200 million GDR (global depository receipts) issue in July. A sustained bear run in the domestic market yanked the share’s price down. And since the GDR price was—as is normal—linked to the domestic price, ICICI could get only a 20 paise premium on the GDR price. Well, bad luck, everybody thought. They thought wrong. Luck had nothing to do with it.

Come September, and the USstock-markets (See ‘Bungee Jumping on the Bourses’, Outlook, October 23). In the week before GDRs had to be priced, SBI stock tumbled from Rs 260 to less than Rs 240 on the Indian bourses. The final GDR price SBI could muster was a meagre 5 per cent premium over the domestic price.

Now it’s the turn of the Videsh Sanchar Nigam Ltd (VSNL), whose constantly-falling price before its jinxed GDR issue—a bear run on its domestic stocks in 1994 forced it to postpone the GDR issue it had planned that year—got a lot of people extremely peeved. Chairman and Managing Director B.K. Syngal openly lashed out at the "unethical" market manipulations being practised by the Foreign Institutional Investors (FIIs). That’s an opinion that a lot of Indian CEOs share but have as yet been unable to voice openly.

The FII gameplan: drag the domestic price, and consequently the GDR price, down, and move the money generated by domestic sale of the scrip out to Europe and pick up shares in the same company cheaper in the Euroissue. A foolproof plan if you have enough money to create a bear run in the Indian market, and if you can move your funds fast enough around the world. The FIIs satisfy both these criteria.

That VSNL was planning a GDR issue worth US $500-600 million towards the end of this year was well-known. Over the past four months, VSNL’s share price has fallen almost 30 per cent, from Rs 1,327.50 on July 22 to Rs 940 on October 18. A sustained bear run on the eve of its GDR issue—that too for the second consecutive time—got Syngal angry enough to dash off a stinker to the Securities and Exchange Board of India (SEBI) and the Finance Ministry.

In its complaint to SEBI, VSNL has named five FIIs—Morgan Stanley, Fledgling Nominees, Robert Fleming, ILF Mauritius and Jaguar Funds—for offloading a sizeable amount of their holdings in the last two months, thus bringing the price down. Since there can’t be total secrecy about the timing of an Euroissue, FIIs get the opportunity to start selling the shares in small doses a few months in advance.

According to VSNL officials, some of the FIIs have unloaded between 30 and 40 per cent of their VSNL holdings in the last two months. On Wednesday, October 16, over a lakh shares of VSNL were traded, bringing the price down by Rs 50.

Recalling the 1994 fiasco, VSNL wrote to SEBI: "One of the FIIs had manipulated the market in January 1994 in order to secure a man date for a private placement at Rs 1,400 of the VSNL scrip against the money raised by them for their growth funds. The research analyst of another FII had issued derogatory statements on the feasibility of the Euroissue. To add fuel to the fire, one FII put their stock on April 25, 26 and 7, 1994, to depress the price of VSNL to Rs 1,000." For the planned 1994 Euroissue, VSNL could get a GDR price of only Rs 1,150 against the company’s expectation of Rs 1,400. The issue was postponed

It looked like a repeat performance this time, raising a lot of questions about the future of GDRs. Fund managers with leading FIIs believe that the pricing of future GDR offerings by Indian corpo-rates will be extremely difficult. "The SBI is a classic India exposure stock," explains Amit Ghose of James Capel B&K. "The response to this issue would affect GDR market sentiments." Adds Pratik Gupta, senior analyst with BZW Equity Research, "Considering the fact that Deutsche Telekom has just started its road-shows for its US $10 billion offering in the global markets, the VSNL issue will be particularly difficult to sell in the international markets at this time."

 Adding to the confusion is the Finance Ministry’s procrastination over the VSNL issue. Senior executives at VSNL admit that even they are not quite clear about the amount to be raised. Says one VSNL official: "It could be anywhere between US $200 million to US $800 million." Market sources, though, estimate the issue size to be US $500-600 million.

The VSNL domestic price has also taken a beating due to the immediate disinvestment plans by the Government in VSNL and Indian Oil Corporation (IOC), which would increase the floating stock of the two scrips in the market.

BUT is there really anything unethical about offloading scrips on the eve of a GDR issue? "As a fund manager, it’s the duty of most FIIs—who, by definition, operate in a global market—to exploit the best possible deal for its funds. What it actually amounts to is hunting for, and in reality creating, arbitrage opportunities," defends one FII operator. That is, you sell in one market, and pick up the same shares cheaper in another.

"The reason why suddenly people seem to have woken up is because unlike other times, the domestic market this time has failed to keep the price steady," observes another foreign fund manager. What he means, of course, is that the Indian financial institutions have not really managed to counter the FII-initiated bear runs in any way. A cash crunch at the Unit Trust of India (UTI), combined with a depressed stockmarket, has kept the domestic bulls away from the ring.

Consequently, a lot of money-raising activities have either been postponed or cancelled. Over the next few months, Indian corporates were scheduled to raise US $2 billion this year from international markets. Grasim Industries, an Aditya Birla group company, had a US $125 million GDR issue up its sleeve for this year. Indian Petrochemicals Corporation (IPCL) was planning to raise US $175 million through a global bonds issue. A string of companies, including the Gujarat State Fertiliser Corporation (GSFC), India Cements and Varun Shipping, have already announced and postponed their GDR issues. Asian Paints, Indian Aluminium and Tata Chemicals are waiting in the wings for the right opportunity to hit the GDR market.

In a way, the FIIs may not have a choice but to sell SBI here and buy SBI in Europe. Says Narendra Nagpal, assistant director, BZW Asia: "The point here is that a lot of fund managers will have to book profits in their emerging markets portfolio in order to subscribe to these GDR issues." Fact is, most India-related funds are absolutely short of cash. Says Nagpal: "Most India-related funds are left with less than 10 per cent liquid cash. A majority of the money has already been invested in India and other emerging markets. These funds are desperate to go liquid in view of the GDRs that are opening up in the near future." 

Coming up is the US $300 million GDR issue from Indian Oil and one from Canara Bank after its domestic Rs 700-crore public issue gets over. That the Government is also in a hurry to divest is evident by its plan to set up a consortium of merchant bankers to manage its divestment programme. Both VSNL and IOC are in dire need of funds for their expansion. Admits a telecom research analyst: "VSNL at Rs 1,000 is definitely a steal. Why, even at Rs 1,300, it’s a bargain. But then it all depends on when they start the roadshows."

 Some companies have found an alternative route. Like Global Tele-Systems, which is all set to launch a 60-million Swiss Franc (Rs 168 crore) convertible bond issue this month. The Swiss convertible route had earlier been adopted by SPIC (60 million Sw Fr) and Bharat Forge (40 million Sw Fr). However, while these small issues have been privately placed, large issues like VSNL and IOC have little option except to try the GDR routes.

And till the domestic market improves, the future of GDRs appear bleak. For, despite VSNL’s complaint to SEBI, the FIIs are doing nothing illegal. Euro-aspiring Indian companies, at the moment, can do nothing better than grin and bear it.