Module: | MODULE A: INTERNATIONAL BANKING
Q206: Consider the following statements regarding the fungibility and issuance of Depository Receipts:
1. Two-way fungibility implies that a foreign investor can convert Depository Receipts into underlying domestic shares, and a domestic shareholder can convert shares into Depository Receipts.
2. Sponsored Depository Receipts are created when a domestic company actively approaches an overseas depository to issue receipts to raise capital.
3. The pricing of a Depository Receipt issue can be set at any arbitrary discount determined by the company board, completely independent of the domestic stock market price.
Which of the statements given above is or are correct?
2. Sponsored Depository Receipts are created when a domestic company actively approaches an overseas depository to issue receipts to raise capital.
3. The pricing of a Depository Receipt issue can be set at any arbitrary discount determined by the company board, completely independent of the domestic stock market price.
Which of the statements given above is or are correct?
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because only statements 1 and 2 are accurate.Structural Breakdown: The Reserve Bank of India permits limited two-way fungibility, meaning investors can cancel their receipts to receive local shares, or local shares can be deposited to re-issue receipts, validating statement 1. Statement 2 is correct; a sponsored issue means the company officially backs the process, as opposed to an unsponsored issue created independently by a broker.
Statement 3 is incorrect.
The pricing of Depository Receipts is strictly regulated and cannot be lower than the price determined by specific regulatory pricing formulas based on the average domestic stock market price over a preceding period.
Historical Context: Initially, India only allowed one-way fungibility, meaning receipts could be converted to shares, but not the other way around.
Two-way fungibility was introduced later to align domestic and international pricing, removing large arbitrage gaps.
Causal Reasoning: The causal reason for prohibiting arbitrary discount pricing is to protect domestic retail shareholders.
If a company issues foreign receipts at a massive discount, it severely dilutes the value of the shares held by domestic investors, leading to unfair wealth transfer out of the country.