The risks of investing into the Stanchart IDR

Without going into the merits of the Standard Chartered Bank IDR issue as far as fundementals are concerned I would like to point out two risks of investing into the issue which investors should be aware of.

Risk 1- This is the bigger of the two risks where essentially investors who are putting money into the issue are investing into an instrument whose underlying share is traded in the UK currency. This is a big risk for investors as given the state of the UK economy it is expected that the Sterling will decline sharply against the USD as well as most emerging market currencies. For example the Pound used to be around Rs 90 to the pound a few years back and as on today it is at around Rs 67-68. Most economists are of the view that the Pound will go to a level of parity with the USD over the next few years and given the fact that the long term direction is of an appreciation of the INR vis a vis the USD the appreciation of the INR against the Pound Sterling will be much sharper. As such investors putting in their rupee savings into an foreign currency denominated asset need to be clear about this risk. Lot of investors who put money into international investment funds floated by a large number of mutual fund houses had to learn this bitter truth by experience.

Risk 2- This risk is more technical in nature where as per the current tax laws the IDR is not an equity share and as such does not enjoy the long term and short term capital gains advantage that listed equities enjoy. As such the taxation will be at the marginal rate for short term gains and at 20% with indexation or 10% without indexation. As such tax adjusted returns will be lower than normal equity investments.

These are risks other than the fundamentals of the bank and the valuations of the offering on which I have no comment to make

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