Standard Chartered's sale of Indian depositary receipts (IDRs) is off to a good start after the offering yesterday attracted the interest of some of India's largest and most high-profile institutions. The UK-based bank, which is set to become the first foreign company to list in India, sold 36 million IDRs to a group of anchor investors who had the chance to place their orders before the official opening of the deal today.
The bank also set the price range for this inaugural IDR offering at Rs100 to Rs115, which will allow it to raise between Rs24 billion and Rs27.6 billion ($510 million to $586 million).
The number of IDRs sold to anchor investors represents 15% of the total offering, or 30% of the tranche targeted at qualified institutional buyers (QIBs), and was the maximum number that could be offered under the anchor investor tranche. The anchor tranche concept was introduced for Indian initial public offerings in June last year to give institutional investors a chance to buy a more meaningful stake in the company than what they can typically do through the online bookbuild where the shares are allocated on a pro rata basis. Under the new system, the bookrunners are able to allocate the anchor tranche shares on a discretionary basis to achieve the best possible combination of quality investors and price.
In return for getting the prioritised allocation, the anchor investors have to put down a 25% deposit when they submit their orders (versus 10% if they subscribe through the regular online bookbuild) and they are subject to a 30-day lock-up.
According to a statement filed with the National Stock Exchange of India last night, ICICI, Birla, HDFC, Sundaram BNP Paribas, Reliance Capital and Franklin Templeton were all allocated shares through the anchor tranche at a price of Rs104 per share. Aside from US-based Franklin Templeton, the other investors are all domestic long-only funds and one source noted that he had never seen the participation by such a strong group of anchors for any one deal before.
A key reason for the interest is likely to be the fact that Indian investors can only invest up to $200,000 in shares of foreign companies under current regulations and the process is often both costly and cumbersome. Because IDRs are denominated in rupees, that limit doesn't apply and the instrument therefore offers a fairly unique opportunity for domestic investors to diversify their exposure.
The agreed price is, however, towards the low end of the indicated price range of Rs100 to Rs115, which is unlikely to dampen the interest for the deal, but could possibly lead to more limit orders when the general bookbuild opens today. The fact that the anchor investors kept the price low is likely at least partly a reflection of the current volatility in global stockmarkets, but since Standard Chartered is already listed in London and Hong Kong, the buyers of the IDRs would also try to obtain at least a bit of a discount versus the existing shares.
The price range, which was announced yesterday morning, straddles the closing price in the UK on Friday, which was used as a reference price. Adjusted for the exchange rate and the fact that 10 IDRs represent one common share, Friday's closing price of £16.13 translated into a price in rupees of about Rs109, which means that the bottom end of the IDR price range implies a discount of about 8.3%. The top end, on the other hand, suggests a 5.5% premium.
While the IDRs are unlikely to sell at a premium, the top end of the range gives some room for the IDR price to follow in case the London-listed shares trade up during the bookbuild. Indeed, the share price moved up slightly yesterday, closing 1.2% higher at £16.33 and reversing part of the 4.6% decline on Tuesday through Friday last week.
It is worth noting that if the online bookbuild results in a higher price than the Rs104 agreed by the anchor investors, then the anchors will have to pay the difference. If the final price should end up lower than the pre-agreed price, the anchor investors will get no refund.
The online bookbuild will open from today until Friday, but with Thursday being a public holiday, the offer period is still the usual three days. Still the extension of the total offering period by one day exposes the offering to additional risk as there is one extra session during which another drop in the market -- or in Standard Chartered's London-listed shares -- could wipe out the entire discount on offer and make the deal look relatively less attractive.
As reported earlier, the bank, which derives more than 90% of its revenues and profits from the emerging markets in Asia, the Middle East and Africa, will sell 240 million IDRs, including the 36 million that went to anchor investors. The deal is small as a portion of the company -- only about 1.2% -- but Standard Chartered has made it clear that it is not seeking this listing because it needs to raise capital, but rather as a way to raise its profile in India and show its commitment to a country where it has operated for more than 150 years.
Consequently, it isn't too surprising that it has chosen to keep the size down, given the ongoing volatility in global markets. Bank officials had earlier indicated that it may sell up to $1 billion worth of IDRs, which would have counted as quite a large transaction in India. And at the very least, they said, the bank would sell enough IDRs to ensure the instrument would be liquid, which they estimated would require an issue of at least $500 million.
In the end, they have stuck to the low end of that scenario, which, supported by interest from the domestic institutions, should ensure the deal will receive sufficient demand from other Indian investors as well.
Analysts at Emkay Global Financial Services noted that at a consensus book value of 1.6 times for calendar 2010 and 1.4 times for calendar 2011, Standard Chartered is significantly more expensive than its peers in Hong Kong and Singapore. However, the premium is justified, they said as: "1) Standard Chartered has a much larger global presence than its peers; 2) Return-on-equity based on tangible net worth is more than 18%; and 3) This issue is a limited option available for Indian investors to own a truly global bank."
A minimum of 50% of the deal is targeted at QIBs and at least 30% will be offered to retail investors. The remainder will be sold to corporate and high-net-worth individuals.
Standard Chartered is the largest foreign bank in India with a widespread branch network that makes it a household name with both institutions and retail investors. India is also its second most profitable market after Hong Kong, with more than $1 billion of profits earned across its various Indian business lines last year. It opened its first branch in the county in 1858.
The offering is being arranged by DSP Merrill Lynch, Goldman Sachs, JM Financial, Kotak Mahindra, SBI Capital Markets and UBS. Standard Chartered's own Indian investment banking arm STCI Capital Markets is a co-bookrunning lead manager and Bank of New York Mellon has been appointed as the depositary receipt bank.