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