What is “Sponsored ADS”?
A conversion of local shares into American Depository Shares (ADS) of a company is called an ADS conversion offer. It is managed by investment bankers, mainly large investment banks familiar with Indian and global markets, on behalf of the company planning such an issue. The entire process is akin to the open offer process and is facilitated by the company itself and therefore it is called as “Sponsored ADS”
Why “A Sponsored ADS” Offer?
Many American investors who are interested in Indian stocks prefer to buy ADS in the US, rather than shares in India, as the latter carries a currency risk and means going through the numerous procedural issues involved in trading in another market. However, in several Indian counters, the ADS floating stock is inadequate to service this demand. As a result, most Indian ADS trade at a premium, sometimes hefty, to their domestic stock price. Companies can increase their floating stock by making another new ADS issue, but that would mean diluting their equity which results in the reduction in the “Earnings per share”. A sponsored ADS issue enables them to get around this.
It’s a win-win situation for all. The company increases its ADS floating stock without diluting equity or raising money.
Investors in the US have more stock to trade in and therefore might not have to pay a high premium to own the company’s shares.
Indian investors have a chance to make arbitrage gains, as the conversion price is based on the higher ADS price, not the domestic price.
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