X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Two-way fungibility unraveled - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 5, 2001

    Two-way fungibility unraveled

    Finance Minister in the budget this year gave into the long-standing demand of the industry for two-way fungibility. What does it mean? And what are the benefits? Read on.

    Fungibility means to serve in place of (i.e. interchangeability). Applying this definition to the capital markets. The term fungibility means interchangeability of any securities of a class.

    Two-way fungibility means investors can freely convert ADRs (American Depository Receipts) /GDRs (Global Depository Receipts) into underlying domestic shares and vice versa. Previously only one-way fungibility was allowed. The ADRs/GDRs could be converted into local shares but could not be converted back into ADRs/GDRs. This effectively meant that once a conversion was done the number of ADRs/GDRs would decrease and could only be replenished by fresh issue of ADRs/GDRs. In effect, this would lead to lower liquidity in the ADR/GDR markets.

    The benefits of two-way fungibility would be two fold:

    • Better liquidity in the ADR/GDR market.
    • Reduction of price differential between the domestic and ADR/GDR markets

    The primary reason for low-liquidity in the Indian ADRs/GDRs is due to the fact that the companies have had very small ADR/GDR issue sizes. For example Wipro listed on the NYSE with 2.3 m shares, which accounts for less than 2% of its equity capital. The small number of shares leads to lower volumes. Ideally, by allowing two-way fungibility, the trading volumes would improve. However, the fungibility is limited to local shares that arise due to ADR/GDR conversions. This implies that a share issued in the domestic market cannot be converted into ADR/GDR (unless it arises due to a previous ADR/GDR conversion).

    Given that most Indian ADRs have historically traded at a premium to the underlying local stocks, converting into domestic shares would not have made sense. Thus, the current impact may be negligible. The impact could be more on the GDR market, which has a longer history and has seen conversions into local stocks in the past. There might be a few takers who would like to re-convert for various reasons. Forex fluctuations could be one of the reasons to convert back to GDR.

    Infosys has always traded at a premium on the NASDAQ compared to the price at the local exchanges. However, once the ADR was converted to domestic shares it was not allowed to reconvert. Now with the two-way fungibility being allowed, players will be able take positions according to their convenience. This would probably help in removing the price differential between the local and the ADR/GDR markets.

    The government has taken a right step, which would significantly help improve the liquidity of Indian ADRs/GDRs, thus, inviting more global interest in the Indian companies.

     

     

    Equitymaster requests your view! Post a comment on "Two-way fungibility unraveled". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 22, 2017 01:13 PM

    COMPARE COMPANY

    MARKET STATS