MUMBAI: Seasoned investors, who regularly compare prices of American Depository Receipts (ADRs) of Indian companies with their locally-listed shares to exploit price aberrations, are adapting themselves to a new trend. Select ADRs, including Infosys Technologies and ICICI Bank, which have mostly traded at a premium to the local shares in the past, are more consistently trading at a discount.

An avalanche of foreign institutional money, especially from exchange-traded funds(ETFs) into Indian markets coupled with increasing prominence of domestic institutions, is mainly responsible for local shares of Infosys and ICICI Bank trading at a premium to their ADRs, said brokers. ADRs are instruments that allow investors in the US to purchase shares of non-US companies. They represent a certain number of shares of a company in its home market.

Foreign investors are now more comfortable about trading directly in India compared to early 2000s, which is changing equations between ADRs and local shares, said a broker, who has profited from price imperfection between ADRs and local shares in the past.

Currently, out of the 13 Indian ADRs listed in the US, only Infosys, ICICI Bank, Dr Reddy’s Laboratories and Patni Computer shares are trading at a premium to the depository receipts listed in the US. ICICI Bank and Infosys are trading at a 2-4% discount to the local shares. The 10% discount in Patni shares premium to the ADR can be attributed to talks of the company’s promoters looking to sell their stakes, brokers said. HDFC Bank. Wipro and Tata Motors are among the other ADRs available on the US bourses.

What is notable is that the discount has happened in ADRs that are liquid and are bellwethers in their sector (Infosys and ICICI), which also partly represent the Indian growth story, the broker said.

In the past, Indian ADRs have traded at least at a 5-10% premium to the local shares, because supply of these receipts has been limited and most foreign investors have been more comfortable investing in US markets. Also, buying ADRs eliminates currency risk of investing in overseas markets.

Some brokers said the premium in local shares to ADRs is an indication that foreign investors are less interested in Indian stocks of late and that recent upsides have been driven by local money.

If foreign investors are bullish on Infosys or ICICI Bank, they can buy it there because of the discount, but that is not happening, which is a sign that there is discomfort about valuations, said another broker on the BSE.

A section of market participants believes that the premium enjoyed by local shares over the ADRs is unlikely to increase from here, as investors will rush to profit from such price differences in such an event. The existing discount is hardly profitable, given the high costs of converting the shares into ADRs, said Arun Kejriwal of Mumbai-based advisory firm KRIS.