Arbitraging possiblity with SAY?

[spino1i]

I noticed what the ADR version of SAY (Satyum Computer, an Indian company) trades for on the NYSE and what SAY trades for on the Bombay Stock Exchange are completely out of sync.

There is a 2:1 value ratio on the ADR, so 1 shares of ADR SAY = 2 shares of SAY. ADR SAY closed at $23.98 last night and SAY opened for 456 rupees on the Bombay Stock Exchange the next morning.

2*(456 rupees/41.04 rupees to the dollar) = $22.22

There's like a 9% difference between the prices of the two stocks! And this has been going on for quite a while now. Am I missing a possible arbitraging opportunity or is there something im missing here?

[Dale Dough]

My knowledge on this subject is limited to hearing about the the Shell/Royal Oil thing, which I heard about in one of my finance classes and A Random Walk Down Wall Street. All I remember is some hedge fund tried to capitalize on a similar discrepancy in share prices across markets, and it went bad.

[Jeff W]

I'm not an expert on arbitrage by any means, but I'd hazard a guess that the rupee is expected to depreciate against the dollar. Is there a similar spread for other stocks traded on both exchanges?

[DcifrThs]

[ QUOTE ]
I'm not an expert on arbitrage by any means, but I'd hazard a guess that the rupee is expected to depreciate against the dollar. Is there a similar spread for other stocks traded on both exchanges?

[/ QUOTE ]

this would be correct by the typical definition of arbitrage (i.e. invest none of your own money, borrow the more expensive asset to purchase the cheaper asset & lock in those prices in teh futures/forward market).

but you could seemingly make a profit now if you owned the more expensive stock. you could just sell your shares, convert them into the other currency in the spot market, and then purchase the cheaper shares.

the big assumption here is that those shares have equal value, which i'd bet they don't since the prices are different. otherwise, it seems obvious that those holders of the more expensive stock are giving up pretty effortless returns.

i have no expertise & did no additional research to come up with this so the situation could be profitable. but only if you actually held the more expensive stock.

Barron

[DesertCat]

Make sure to read the company filings carefully to make sure you aren't missing anything (is the ratio exactly 2-1, or is there a slight difference?). I usually first check on whether there is a large dividend due to account for the discrepancy, but you said this has been going on a long while.

Your main problem is that unless the ADR is convertible into SAY shares or vica versa, how are you going to arbitrage? Classic arbitrage involves simultaneously buying and selling the exact same security on different markets. My guess is there is no conversion rights, why would SAY want the number of shares of the ADR to change?

If there is no conversion rights, you actually have two different securities, and they can trade at different prices forever. If SAY was going private, and you had an end date in which the ADR's were guaranteed to get 2x SAY's price, then you could do some arbitrage.

[edtost]

you can usually convert ADR -> local, but not the other way around, so it doesn't seem like there's an arb here. the price discrepancy is probably a liquidity premium on the ADR, though it does seem somewhat large, which might have something to do with the time difference between the two quotes.