Higher ADR prices open up arbitrage opportunity

IT companies may be losing sleep over the appreciation of the rupee, but they must be happy to see their stocks enjoying premiums compared to their prices on BSE and NSE.

Says Amit Rathi, MD, Anand Rathi Securities: “The stocks in the overseas market trade at a premium because more liquidity chases fewer shares on the overseas bourses.”

Of the 10 American Depository Receipts (ADRS) listed on the Nasdaq or NYSE, eight were trading at a premium in the range of 0.6-19.3 per cent. With two-way fungibility allowed, investors can make money by buying shares in one exchange and selling in another.

However, there are timing and currency risks associated with such transactions. Conversion of shares to ADRS or vice versa takes a minimum of five working days and if either the share price or the rupee-dollar value swings wildly, the investor can make windfall profits or suffer huge losses. Says Rathi: “Therefore, we don’t see conversion happening when the local shares are trading at a discount.”