Law of One Price: A Chronicle of Dually Listed Indian Stocks

104 Pages·2023·2.494 MB·English

by  Vinodh Madhavan, Partha Ray

Law of One Price
Law of one price continues to be a central tenet of Financial Economics.
This book is devoted towards examining law of one price in the context of
dually listed shares of Indian companies.
The book delves on the relationship between the prices of domestic
shares issued by Indian companies and the prices of foreign shares issued
by the same companies. It also examines the evolving uncertainty in
relationships between such dually listed shares issued by Indian companies.
It draws upon the insights that we garnered over the years while working on
technical papers in this area.
The book, thus, undertakes concerted efforts to present facts in a manner
that sensitise and meaningfully inform readers of the prevalent breadth and
depth of dual-listing (cross-listing) landscape globally and more so, locally
(India).
Vinodh Madhavan , Ahmedabad University, Ahmedabad, India .
Partha Ray , National Institute of Bank Management, Pune, India .
Routledge Focus on Management and Society
Series Editor: Anindya Sen
Pro Vice-Chancellor, School of Social Sciences,
Ramaiah University of Applied Sciences, India
The aim of the Focus series is to present the reader with a number of short
volumes which deal with important managerial issues in the Indian con-
text. Volumes already published in the series cover topics which are of
perennial interest to managers, like strategic change and transformation,
and supply chain management, as well as emerging areas of research like
neuro-marketing and digital culture. CEOs today also need to be famil-
iar with critical developments in other fields, like auction theory and the
contribution of sociology to management thinking. A forthcoming volume
examines the law of one price in the context of dually listed shares, that is,
shares which are listed in both Indian stock markets and abroad. In other
words, the Focus series is designed to introduce management theorists and
researchers (as well as the general public) to a diverse set of topics relevant
directly or peripherally to management in a short, readable format, without
sacrificing basic rigour and set in the Indian context.
Books in this series :
Digital Cultures
Smeeta Mishra
Artificial Intelligence, Business, and Civilization
Our Fate Made in Machines
Andreas Kaplan
Law of One Price
A Chronicle of Dually Listed Indian Stocks
Vinodh Madhavan and Partha Ray
For a full list of titles in this series, please visit: www.routledge.com/
Routledge-Focus-on-Management-and-Society/book-series/RFMS
Law of One Price
A Chronicle of Dually Listed
Indian Stocks
Vinodh Madhavan and Partha Ray
First published 2023
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an information business
© 2023 Vinodh Madhavan and Partha Ray
The right of Vinodh Madhavan and Partha Ray to be identified as authors
of this work has been asserted in accordance with sections 77 and 78 of
the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice : Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
ISBN: 978-1-032-45781-9 (hbk)
ISBN: 978-1-032-45782-6 (pbk)
ISBN: 978-1-003-37868-6 (ebk)
DOI: 10.4324/9781003378686
Typeset in Times New Roman
by Apex CoVantage, LLC
Contents
List of Figures vi
List of Tables vii
Preface viii
Acknowledgements x
1 Introduction 1
2 Depositary Receipts: Global Trends and the
Indian Story 16
3 Is the World Flat?: Domestic Share Prices vis-à-vis
the Prices of Their Depositary Receipts 39
4 Conclusion 79
References 87
Index 91
Figures
2.1 Illustrative structure of a DR 18
2.2 Tensions of impossible trinity 26
2.3 Issuance of depositary receipts by Indian firms during
1992–1993 through 2019–2020 (in USD million) 32
2.4 GDP growth rates of major economies and India:
2001–2019 33
2 .5 Exchange rate of Indian rupee relative to USD:
2000–2020 34
2 .6 Capital issuances through DRs across the world
exchanges: 1991 to 2020 35
2.7 Capital issuances by firms based in select countries:
1991 to 2020 36
3.1 Prices of Dr. Reddy’s Laboratories ADR and domestic
share 41
3.2 Dr. Reddy’s Laboratories ADR premium 42
3.3 Luxembourg versus Mumbai: responses of GDR to
innovations in underlying scrip 55
3.4 London versus Mumbai: responses of GDR to
innovations in underlying scrip 59
3.5 New York versus Mumbai: responses of ADR to
innovations in underlying scrip 61
3.6 DCC plots between Luxembourg-listed GDRs and their
underlying domestic shares 70
3.7 DCC plots between London-listed GDRs and their
underlying domestic shares 73
3.8 DCC plots between New York-listed ADRs and their
underlying domestic shares 74
Tables
2.1 India’s balance of payments: 2018–2019 (USD million) 21
2.2 Amount of active DRs issuances by select countries at
major stock exchanges (in USD million, as on 31 December
2020) 24
2.3 Number of active DR issuances by top five countries
at major stock exchanges as on 31 December 2020 24
2.4 Capital raised by issuers of each country (in USD million
as on 31 December 2020) 25
2.5 Permissible jurisdictions and international exchanges 29
2.6 DR issuances by Indian firms across different stock
exchange (total capital raised as on end April 2019 in
USD million) 31
3.1 Trading hours in select stock exchanges (in terms of Indian
standard time) 40
3.2 DRs issued by select companies: a snapshot 45
3.3 Correlations between Depositary Receipts (DRs) and their
underlying scrips 54
Preface
We have been working together on the generic theme of dually listed Indian
stocks for some time. We have published a few papers in professional jour-
nals pursuing the research question: Are the prices of a stock of an Indian
corporate listed in BSE/NSE and the prices of their foreign counterparts
under the garb of Global Depositary Receipts (GDRs)/American Depositary
Receipts (ADRs) related? If so, what is the kind of such a relationship?
While working on these issues, we realised that this research question is
related to a larger issue of the ‘law of one price’, which essentially affirms
the power of competitive forces (in absence of restrictions on the trade of
goods and services and low transport cost) over the limits of geography.
Since share trading happens in the virtual place of computer terminals,
called stock exchange, and the flow of information happens in a nanosec-
ond, one would expect the price of a share of an Indian corporate (in rupees)
listed in a domestic stock exchange and the price of its share listed in New
York stock (in dollars, but expressed at the current rupee-dollar exchange
rate) to be reasonably close. And we thought that the issue may be of gen-
eral interest.
Around that time two specific things happened.
First, while discussing the issue with Professor Anindya Sen, he encour-
aged us to write a book on this particular issue without assuming much prior
knowledge/information of the specifics of the stock market on the part of
the reader.
Second, we hit upon a somewhat old but relatively less cited 2003 article
by Owen A. Lamont and Richard H. Thaler in the J ournal of Economic
Perspectives that specifically talked of the law of one price in the financial
markets and even considered the case of American Depositary Receipts as
an illustration.
The result is this short book of dually listed stocks of India, where we
have tried to explain the underlying concepts and stylised facts in terms
of first principles. In doing so, we were also guided by Albert Einstein’s
Preface ix
famous quip, ‘Everything should be made as simple as possible, but not
simpler’.
W hile this short book is born out of our technical research in select areas
pertaining to dually listed shares, we do hope that it offers a snapshot of the
breadth of the depositary receipts landscape and also adds to the texture of
the landscape of dually listed shares in the Indian context.
Vinodh Madhavan
Ahmedabad
P artha Ray
Pune