The Hindu Business Line : Sponsored ADRs — Make the tender book transparent

The shrinkage in the floating stock during a sponsored ADS offer has significant implications for prices on the spot and the derivatives market. In such cases, online disclosure of tendered shares in real time is a must.

THE need to improve the quality of disclosures in a Sponsored American Depository Shares (SADS) offering is evident, even as the first such float has just been completed by Infosys Technologies. In SADS, shareholders get an opportunity to sell their holdings in the overseas market. The cash generated by such a sale is distributed to the shareholders, to the extent their shares are accepted. This is in contrast to an ADS offer, where fresh shares are issued and cash flows augmented.

Acceptance level: In the SADS, the allocation process is fairly well-defined. The acceptance level is linked to the offer size and the equity capital. If all shareholders tender, the proportion would be straightforward — offer size divided by equity.

The Infosys offer document that was sent to shareholders lays down the process clearly. But the regulatory framework must be altered to provide for the following:

The offer document must indicate what percentage of holdings will be accepted, if all shareholders participate. For instance, in the case of Infosys, the acceptance ratio would have been 4.53 per cent of the equity holding.

But the acceptance ratio was higher at 5.86 per cent as all the shareholders did not participate. So, the offer document must clearly indicate that the acceptance level could be higher than the floor of 4.53 per cent, if participation levels are lower.

The process must be applied in such a way that shareholders, who tender at the floor level enjoy the benefit of all the tendered shares being accepted. They should not be required to tender their entire holding, or a large part of it, to get the benefit of the minimum acceptance. This would ensure that the shareholders do not have to forego liquidity on a large part of their holdings, for the period of the offer.

For example, in the Infosys case, let us assume those holding 50 per cent of the equity participated. The acceptance ratio would have been 9.06 per cent (twice the floor).

In such an eventuality, if a shareholder with 1,000 shares has tendered just 50, the entire lot placed on the table should be accepted; 90 shares would have been accepted. Had this shareholder tendered more than 90 shares, he would enjoy the benefit of acceptance for only 90 shares. In such a case, the position would be analogous to a rights offer where shareholders know exactly how much to pay for their rights.

Offer period disclosures: During the offer period:

Akin to a book-built IPO, information about the number of shares tendered should be available real-time and online.

This information is of importance for the shareholders to form a view on the level of tendering that is likely. Shareholders who feel participation may not be widespread may then be able to tender a larger number of shares.

Now, certain classes of shareholders, such as promoters and select institutional shareholders, may have a better idea of the response and may be able to reap the benefits of such information. Real-time and online disclosure of the book will even-out this advantage.

There may also be signals from the level of shares tendered by each category of shareholders, especially the promoters, the FIIs and the mutual funds. If the shares tendered by such classes of investors are high, participation by other shareholders would be driven by how they perceive the step to be — positive or negative.

The disclosure will also open up avenues for some shareholders to take a contrarian view and stay away from the process. Such investors may attach greater weight to the liquidity in holding the shares than the possibility of gains in SADS.

The level of shares that are tendered is also important from a secondary market point of view. If a large number of shares are tendered, it would lead to a shrinkage in the floating stock during the period the offer is open and will prevail till the process is completed, when the demat accounts are credited for the shares that are not accepted.

The shrinkage in the floating stock (as a percentage of the free-float, it can be significant) can lead to a surge in spot prices as trading opportunities open up.

Once the process is complete, the stock price may wind down, as has been the case with Infosys. The price effects will also be felt in the futures and options markets. But if the quantum of shares tendered is known, it may help investors decide on buying and selling in a more informed manner. Pricing distortions in the spot and derivative market will be reduced.

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