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| Feature: Eastern Promise |
A Passage to India
Saritha Rai
09/01/2005
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Yet in spite of the
sluggish Indian index, the track records of individual large-caps that have
ventured overseas have impressed in the past year, especially the stocks of
bellwether software services firms—Infosys Technologies (INFY), up 71 percent;
Wipro (WIT), up 42 percent; and Satyam Computer Services (SAY), up 26 percent.
These firms continue to project 30 to 40 percent growth in annual profits.
India has seen a dramatic dramatic run-up in the last
five years when it was
discovered by foreign capital;
that happens only once. | Investing in American Depository Receipts (ADRs) is simple. As large-caps
that have passed SEC muster, those listed in the U.S. offer a reasonable amount
of transparency and potential for growth—but there is a catch. The ADRs of
Indian companies traded on the NYSE command a fairly sizable premium compared to
shares traded on Indian exchanges. The premium for Infosys is 30 to 40 percent.
The price difference is explained by U.S. investor demand, relative valuation,
market risk and absence of an arbitrage opportunity (because U.S. investors
cannot participate in the Indian exchanges, they cannot arbitrage the difference
in the prices). Infosys and other large companies have recently attempted to
address such shortcomings—and improve their global branding—by moving stock
directly to the U.S. In May, Infosys’ offering of 14 million ADRs boosted its
trading liquidity on Nasdaq from 21 million shares to 35 million and pumped its
ambitions of entering the Nasdaq 100 by 2006.
Property Rights and
Wrongs
The demand for both commercial and residential real estate is booming.
But foreign investment remains a daunting proposition. Real estate transactions
were not open to foreigners until this past March. Now foreigners can own
property outright, but only parcels of 10,000 acres—nearly 16 square miles—or
more. These might encompass office parks, resorts, even special economic zones
for low-tax offshore production.
Perhaps a more pragmatic way for foreign
investors to participate is through a professionally managed, diversified
capital pool. Funds specializing in the booming hotel sector include Brooke
International Fund, Dalmia Capital Fund, Indian Real Estate Opportunities Fund
and the Merlion Fund of Temasek Holdings. A number of Indian banks, including
ICICI Bank and HDFC Bank, are contemplating floating real estate venture funds
open to foreigners. Bear in mind that all the funds above are new, and must be
approached with caution. A number of international property advisors, including
Jones Lang LaSalle, Cushman & Wakefield, Knight Frank and CB Richard Ellis,
have offices in India to counsel foreign investors on regulatory issues.
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