Standard Chartered IDR: Known unknowns

Sandip Sabharwal, used to be the fund manager of the blockbuster SBI Magnum Mutual Fund, and made quite a name for himself by beating the benchmark indices for many years. He is currently the head of Portfolio Management at Prabhudas Liladhar. He is an IIT Delhi & IM Bangalore Alumnus.

He has an interesting post on his blog discussing some of the risks of investing in the Standard Chartered IDR. The post is available here.

In his view, the currency risk of investing in an instrument whose price is likely to closely track the performance of a stock listed on the London Stock Exchange is the biggest risk. Also, he points out that IDRs will receive differential tax treatment, and will attract both long term and short term capital gains tax. Unlike a common equity share, which does not attract long term capital gains tax in India at present, the Standard Chartered IDR will.

I would like to add another line of thought to the discussion. Unlike Unilever, Siemens and other MNCs which have listed their local subsidiaries in India, Standard Chartered has chosen to list a Depository Receipt, which is essentially equivalent to one-tenth of a share of Standard Chartered Plc, an entity which is listed on the LSE & the Hong Kong Stock Exchange. Unlike other Indian bank shares, the IDR is exposed to 2 major risks. The company stands exposed to the UK economy which is yet to fully emerge from the Great Recession, and which is staring at many years of tough economic reforms. This is likely to keep UK stocks depressed for the foreseeable future.

Also, the bank is listed on the HKSE. Hong Kong, by virtue of its exposure to the Chinese economy, is highly vulnerable in case the Chinese economy slows down, as a consequence of Government moves to calm the country's real estate market.

At the end of the day, the IDR will move in tandem with the shares of Standard Chartered Plc in LSE & HKSE.

Value investors would be well advised to keep these factors in mind before investing in the IDR.