Fwd: FW: Standard Chartered IDR - Fungibility
Prabhakar A.K
StanChart: India proposes 'fungibility' for IDRs
This report is in continuation with our earlier buy recommendation for the stock “Standard Chartered IDR” dated 8th July, 2011. We still maintain our positive view of the stock mainly after the government’s proposal of allowing two way fungibility to IDR’s. We maintain our target price of Rs. 120 for the stock.
In his recently-presented Budget, the Indian Finance Minister proposed allowing two-way fungibility of Indian depository receipts (IDRs). This is meant to encourage “greater foreign participation in Indian capital markets”, Finance Minister Pranab Mukherjee said in his Budget speech to Parliament. The move would reverse a ruling by the Securities and Exchange Board of India, which last June denied investors the chance to convert Standard Chartered IDRs into overseas stock.
Two-way fungibility means that depository receipts (ADRs/GDRs) can be converted into the underlying shares, and the underlying shares to depository receipts. Fungible means is the ability to substitute one unit of a financial instrument for another of the same financial instrument. In trading, however, fungibility usually implies the ability to buy or sell the same financial instrument on a different market with the same end result. A financial instrument (individual stock, futures contract, options contract, etc.) is considered fungible if it can be bought or sold on one market or exchange, then sold or bought on another market or exchange. Fungibility would allow investors the flexibility for inter-market arbitrage.
If a hundred shares of a stock can be bought on the DAX in Germany and the same hundred shares sold on the Shangai Stock Exchange in China with the result being zero shares, the individual stock would be considered fungible. Fungible financial instruments are manifold, the most popular being individual stocks, some commodities (gold, silver, etc.) and currencies.
Fungible financial instruments are often used in arbitrage trades, because the difference in the price (the arbitrage part) often arises from the difference in location (the fungible part).
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A.K.Prabhakar