Several Indian companies actively trade on the London and New York Stock Exchanges and due to the time differences, market news, sentiments etc. sometimes the prices of the DR(Depository receipt) trade at discounts or premiums to the underlying stock. This presents a knowledgeable fund manager an arbitrage opportunity, where he buys the DR abroad and sells the same stock in India at a higher price (the difference being the profit).

Same DRs trade during India market hours offering a live arbitrage opportunity. As there is very little risk in such trades the gap between the DR and underlying stock is minimal. DRs which trades in the US markets offer better gaps, but there is the overnight risk to be factored in. Hence the fund manager must take into consideration the local market conditions before buying the stock in the US, as he must be confident of the selling off the stock the next morning in India at the profitable gap.

Once the stock is bought, arrangements are made to deliver the stock in India, which involves several procedures (stock is borrowed at times for this). Once the stock is delivered in India the proceeds are allowed to be repatriated and the process repeated.

There are some stocks which are also allowed to be bought in India and converted into the DR forms, which is attractive if the DR is trading at a premium to the Indian stock price.

The Process

1. Buy DR
2. Sell local stock in India in cash market or futures market.
3. Convert shares from DR to local.
4. Deliver shares to stock exchange in India.
5. Deposit proceeds in Indian bank account.
6. Repatriate funds.
7. Repeat process.

The Costs

1. Foreign brokerage.
2. Local brokerage.
3. Custodian charge for conversion (local and global).
4. Back charges for transfer.
5. Fund manager charge.