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Infosys Technologies surprised the bourses by issuing 16m American Depository Shares (ADSs), which, as per latest quotes on the Nasdaq, is worth $1.05bn.

As per Infosys' ruling price in the domestic market, the size of the company's second sponsored ADS issue works out to just over $700m (Rs 3,227 crore).

The company's board on Monday approved to convert 5.9% of its total capital (16m shares) into ADSs to impart liquidity to the stock on the Nasdaq. After the first sponsored issue, the liquidity had risen to 8%. This issue will increase it to about 14%.

A sponsored ADS issue is essentially meant to infuse liquidity in overseas stock markets by converting local shares into ADS.

The issue is likely to hit the market in the first quarter of '05 after the Christmas/New Year break. The company has convened an EGM on December 18 to get shareholders' approval for the issue.

The sponsored ADS is one of the largest issuances from India. In December last year, London-based Vedanta, the holding company of the Sterlite group, raised around $1bn through a public issue. While Vedanta is technically not an Indian company, most of its assets are located in India.

As the Infosys' ADS is trading at around 50% premium to the local price, a back-of-the-envelope calculation indicates that shareholders of Infosys, after taking transaction costs into consideration, are likely to see a windfall upwards of Rs 1,500 crore as local shares are converted to ADSs in a 1:1 ratio. Like last time, the biggest beneficiaries are likely to be the promoters of the company.

Analysts said that arbitrage opportunities will certainly dwindle ($65.59 on Nasdaq on November 5 against Rs 1,976 on NSE on the same day) after the issue. Currently, only 21.2m shares, equal to 7.9% of the company's equity capital of 267.9m shares are listed on the Nasdaq. In July '03, the company had converted 3m local shares into ADRs and offered them on the Nasdaq at $49 per share, then at around 27% premium to the local share.

"For the last few quarters, the company has been performing extremely well unlike some earlier quarters. This is an opportune time to initiate a share conversion to raise liquidity on the Nasdaq. Moreover, this exercise provides ample branding for the company since it is going global in the true sense. In fact, this has been getting slowly discounted in the market price for quite some time since we always expected the move," said analysts.

Apart from inducing liquidity, the sponsored secondary ADS issue can also be used as an attractive tool to attract overseas talent through ESOPs.

"Though Infosys is not keen on employee stock option schemes, it is an imperative in global markets to attract non-Indian talent for overseas operations," said an analyst. Given the wild gyrations in the valuations of IT stocks in India, Infosys has kept its local ESOP programme in abeyance.

Stock markets gave a thumbs-up to the ADS issue as the scrip rallied to Rs 2,068 on the National Stock Exchange (NSE) before close at Rs 2,017, gaining Rs 41 from its previous close at Rs 1,976.

Windfall for promoters

While the main reason for a sponsored secondary ADS issue is to infuse liquidity, it also serves as an effective tool for large shareholders - primarily promoters and big institutional investors - to offload a small percentage of their holding without causing too much turmoil.

If the last sponsored ADS issue is any indication, promoters and founder members of Infosys are likely to emerge as the biggest beneficiaries from this one as well. According to documents filed before the Securities and Exchange Commission (SEC) in the US, directors and executive officers of Infosys sold 8.02 lakh shares valued at around Rs 330 crore in the ADS conversion programme.

Company chairman NR Narayanamurthy led the pack of investors who surrendered their shares, accounting for 9.3% of the total issue size, followed by Nandan Nilekani who accounted for 6.4%. The inherent structure of the ADS conversion programme favours the large investors though the issue is open to all.

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