Standard Chartered IDR In Depth Review reveals Retail Investor Disadvantages

I had earlier written about Seven Reasons for Not Subscribing to the Standard Chartered IDR based on a high level analysis.Going through the massive 811 page Red Herring Prospectus has reinforced by earlier thesis –  that subscribing to the StanChart IDR is not a great idea .In my opinion it would be a very bad idea for a retail investor to even think of investing in this Standard Chartered IDR.Not only is Standard Chartered as a stock not a great investment but also the “IDR instrument is untested and disadvantageous  to the retail  investor.”

Indian IPO – InDepth Analysis and Review of Standard Chartered IDR reveals Retail Investor Disadvantages

Disadvantages of Standard Chartered IDR

1. Indian Depositary Receipts suffer from inherent drawbacks with cumbersome processes and fees – Converting an IDR to StanChart shares is going to be tedious and costly process far beyond the capabilities of a retail investor.He has to run to the RBI to convert his IDRs and then get a Withdrawal Order to convert form his IDRs to shares.He cannot convert a non multiple of 10 IDRs to share plus he cannot hold the StanChart shares for more than 30 days.To do such much running around for conversion,I think StanChart should give me a much bigger discount than 5% for  buying their IDRs.




2. Currency Risk when Dividend is Distributed – The company will convert the dividend from Pounds to Ruppees.The conversion costs and the exchange risk will have to be borne by the investor.From the prospectus
   

   “If exchange rates fluctuate during a time when the Depository cannot convert such cash distribution, IDR Holders may lose some or all of the value of the distributions.”

3. Valuation is not cheap and Earnings fell by ~15% in FY09 – At 14X FY09 earnings , the valuation of StanChart on a trailing earnings basis does not seem cheap given that its earning fell by 15% (to Rs 77 from Rs 89) in that year.Compared to the quality Indian banks this valuation is quite expensive on a PEG basis
4. Being a UK Based Bank, it carries UK sovereign risks – The European contagion has been a story of high sovereign debts and the high fiscal deficits.UK carries the same risk with high public debts and fiscal deficits of more than 10%.In case of a Greek like crisis hitting UK , StanChart will be severely affected.It also faces Regulatory risk as UK imposes more stringent capital regulations on the financial sector.
5. “The ability of IDR Holders to receive such further Shares from the Company (either in the form of Shares or IDRs representing the Shares) may be restricted” – This seems self explanatory . Company may issue additional bonus share but due to different legal systems of India and UK , IDR holders may not get those shares/securities and the compensation in lieu may not be sufficient.
6. No Specific Tax Regulations applicable to IDR’s – Issuing IDR’s without adequate Legal and Tax visibility seems to me as if StanChart is selling a half baked item . Currently the IDRs would be taxed at much higher capital gains tax compared to Indian share,so you need a much higher return from StanChart IDR to compensate for the higher taxes which I don’t think you will get.
7. Large Exposure to Hong Kong – StanChart has the biggest exposure and presence in Hong Kong with a majority of its profits coming from that country.Hong Kong in turn is greatly influenced by happenings in China.Many reputed commentators think that China might be in for a hard landing due to a bursting of the real estate bubble.A good idea maybe to buy the recently launched HK ETF which has a large exposure to HK’s financial sector

I have not been able to see too many advantages but here are a couple . They however do not change my mind of StanChart IDR being a strict no-no for the Indian investor

Advantages of Standard Chartered IDR

1. Diversified exposure to Developing Markets – StanChart gets most of its revenues and profits from Asia Pacific specifically Singapore, HK, Korea, India, Africa and other SE Asian countries.This makes it less exposed to developed world assets.Conversely it is  exposed more to countries facing greater geopolitical risks like Korea
2. Decent reputation and Recognizable brand – Stanchart has come through this financial crisis with its reputation intact and has a good brand recognition .

Additional Opinions on Standard Chartered IDR

Here are some links to some of the more interesting opinions on Standard Chartered’s IDR that I found

1. One Mint
2. EveryBoy’s Blog
3. Denip Consultants
4. Sandip Sabharwal.
5. Subra Money