VRL Logistics steered successfully down the IPO route last month. Other companies are eyeing fundraising opportunities, but will they race ahead or hit regulatory roadblocks? Vandana Chatlani reports
In 1976, Vijay Sankeshwar set up a small business in Gadag, a small town in north Karnataka. What began as a humble enterprise with a single truck evolved into VRL Logistics – a thriving logistics and transport company and India’s largest fleet owner with close to 4,000 vehicles.
Last month, VRL launched its initial public offering with tremendous results. Priced at ₹205 per share, the stock was 74.26 times oversubscribed, receiving bids for 1.2 billion shares, against 16.2 million on offer, from qualified institutional buyers (QIBs), high net worth individuals and other investors.
In the end, VRL issued 23.1 million shares for proceeds of ₹4.73 billion (US$75 million). On the day of listing, 30 April, the shares opened at ₹288, and ended the day 43% above the issue price.
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VRL has gone down the IPO road twice before this offer, in 2008 and 2010. On both occasions, the offers did not materialize, primarily because of poor market conditions following the Lehman Brothers scandal and the ensuing global financial meltdown.
According to Varoon Chandra, a partner at AZB & Partners in Mumbai, who led the team that advised VRL, the oversubscription can be partly attributed to investor hunger for logistics stock. VRL had the added advantage of being the largest player in India in this business.
Analysts say VRL’s strong business fundamentals, its reputation as a good, clean company with a clear line of succession, an easy to understand business model and the attractive valuation offered all contributed to the IPO’s success. Still, the oversubscription surpassed expectations. “More than the subscription in the IPO itself, upon listing, the stock started trading at a 50% premium to the issue price, which is quite phenomenal and unheard of in recent times,” says Chandra.
A smooth ride
Part of the surprise stemmed from poor investor response to two IPOs preceding VRL’s, those of Ortel Communications, a cable and broadband service provider, and AdLabs Imagica, a theme park operator. AdLabs was forced to revise its price band from ₹221-230 per share to ₹180-215 per share and extend its closing date from 12 March to 17 March after its offer was only 3% subscribed on its opening day. The offer finally raised ₹3.37 billion and was subscribed 1.11 times. Ortel’s offer was only 75% subscribed but it managed to raise ₹1.75 billion.
By contrast, investors responded well to Inox Wind’s IPO in early April, which generated over ₹10 billion and was 13.81 times oversubscribed.
VRL’s IPO offered an exit to Mauritius-based private equity investor New Silk Route (NSR), which first invested in the company in 2011. Bhakta Patnaik, a partner at S&R Associates who advised NSR, believes his client’s efforts to build strong internal management systems, good corporate governance standards and a focused business model contributed heavily to the success of VRL’s offering.
At one point, VRL was as focused on its passenger bus business as it was on freight and logistics. But having realized the opportunities of e-commerce over the past few years, it divested some of its ancillary businesses and became more freight-centric. This, says Patnaik, is the story it has been able to sell so well. “In the five years between the last attempt and now, they’ve managed to structure themselves into a much more focused business model.”
VRL’s internal systems and its “tech-savvy” management made Chandra’s task of collating information for the prospectus much easier. A five-member team from AZB & Partners worked almost full time from August until December, when the prospectus was submitted. As a result, the firm faced no serious legal challenges, but had to conduct due diligence on large volumes of information.
Biswajit Chatterjee, a partner at Squire Patton Boggs, which represented HSBC Securities and Capital Markets India and ICICI Securities on the offering, says marketing the company and pricing the offer was a challenge. “There are not that many logistics companies that have listed in India and there’s really no equivalent or competitor company in India,” he says.
Chatterjee points out that NSR’s backing helped substantially, as well as Snowman Logistics’ IPO, which hit the market a few months ago. “Snowman did really well, so clearly there’s a lot of potential and interest in this sector,” he says.
The new breed
India’s bourses have traditionally been unfavourable for companies in a variety of sectors linked to e-commerce and technology because of stringent requirements relating to profitability and lock-in provisions. But burgeoning interest in these businesses and their desire to raise capital in India has led the Securities and Exchange Board of India (SEBI) to consider an alternative capital raising platform offering a more relaxed regulatory regime for start-ups.
“The kind of IPO deals we are currently executing are quite different from what we’ve seen in the Indian capital markets in the past,” says Manan Lahoty, a partner at Luthra & Luthra. “The majority shares in some of these companies are not owned by large companies or family businesses, but by a clutch of private equity investors.”
SEBI has referred to such businesses as “new age companies” with an “innovative business model” belonging to the “knowledge-based technology sector where no person holds 25% or more of the pre-issue share capital”. In a discussion paper, SEBI said that such companies could be considered “professionally managed” and could potentially be allowed to access capital from an alternative capital raising platform through institutional investors and high net worth individuals.
“If the capital raising process in India is not made further relaxed for such issuers, they may be driven to list on stock exchanges outside India,” SEBI said in its paper. The regulator has proposed to exclude retail investor participation because of the high risk of these investments.
Arka Mukherjee, a partner at J Sagar Associates, believes that excluding retail participation is “a good balancing measure” on SEBI’s part as it would protect investors while providing new age ventures access to fundraising through the domestic primary market as an alternative to offshore listings. SEBI has also proposed to reduce the lock-in period for 20% of post-issue share capital from three years to six months; remove its requirement for new age companies to show three years of profitability before being permitted to raise capital; and ease disclosure norms for these start-ups. “Given the complexities of the business model and the fact that some of these e-commerce ventures are yet to become profitable, doing away with a track record and reduced compliance norms makes life simpler for these ventures,” says Mukherjee.
Back on home turf
Will easing regulations be enough to attract companies that looked beyond India for fundraising opportunities in the past? Patnaik thinks so. “If you look at Just Dial’s share price and valuations today they are getting very good value out of the Indian market,” he says. “It’s a story that’s easy to understand. More complex stories on the tech side may or may not get that kind of valuation. But fundamentally, there is a shift towards listing in India – even with tech companies with understandable business models.”
According to Patnaik, while Indian companies may be tempted by overseas listings for tax and branding purposes in addition to good valuations, from a pure valuation perspective a business which is well understood in the Indian market would get more or less the same response in India as it would overseas. “In terms of the investor universe, the markets are so global nowadays that the same people can invest in India and companies can get a fair valuation,” he says. “Some tech companies have said that they are more interested in an Indian listing if it is easier from a regulatory perspective.”
Crossing the t’s and dotting the i’s
Stringent rules on disclosure and diligence make IPO preparations particularly cumbersome in India
The IPO process is a laborious one anywhere in the world, but companies and their legal advisers in India are often saddled with additional diligence requirements which add to the burden of data mining.
Some lawyers say the Securities and Exchange Board of India’s disclosure and diligence requirements are hugely time consuming. “No one is saying don’t do diligence, but they’ve started coming up with very painful requirements whereby, for example, every statement needs to be backed up and you need to do a line-by-line collation exercise,” says one lawyer.
When comparing SEBI’s approach with those of leading regulators elsewhere, many agree that the Indian regulator is too prescriptive about what should go in a filing.
One example is the information required on board directors. In the past, SEBI simply wanted certificates with a director’s educational credentials and experience. Now, lawyers are expected to physically verify these documents. The process can be laborious as well as embarrassing with lawyers having to nag directors, many of whom may be business veterans, for proof of their achievements.
Chandra says it is important for SEBI to streamline the disclosure requirements for IPOs, particularly given the amount of volume-based disclosure relating to litigation, group company details and promoter information. “That’s where a lot of time, effort and cost goes into the picture,” he says. “If they manage to work on that it will help cut costs and timelines significantly.”
Changes on the horizon?
Lawyers have welcomed SEBI’s proposal to provide an online route for IPO subscriptions, which SEBI hopes will boost retail participation and reduce market fluctuations when the shares start trading. Electronic means are also proposed to reduce the time between the closure of an issue and the start of trading, so investor funds would be blocked for a shorter period.
The proposals would reduce “complex post-issue paperwork,” says Arka Mukherjee, a partner at J Sagar Associates. “Under the new process the post-issue timeline is expected to reduce from 12 days to six days and be further cut down to two or three days once the new process has been laid down.
If SEBI’s proposals are successfully implemented, it will dramatically improve the situation for large transactions with foreign investor interest. “They were locked up to the extent that if they decided to invest in an IPO, they wouldn’t get shares to be traded for almost three weeks,” says Manan Lahoty, a partner at Luthra & Luthra. “Those investors will obviously not want to keep their bets on for a long time without getting the shares.”
Sandeep Parekh, the founder of Finsec Law Advisors, points out that e-IPOs may have limited results because the Indian IPO market has always been oriented towards retail participation. Retail investors bring in what Parekh calls “natural inefficiencies” where form filling can easily lead to errors. “The retail focus means timelines cannot be compressed beyond a particular point,” he says. “I don’t see that changing in the near future. But as more institutional investors realize it’s a pretty high-risk market, it’ll become more of an institutional market where people subscribe for the longer term rather than punting for two weeks till the initial listing.”
Other developments include the option of unsponsored global depository receipts (GDRs) which have been permitted by the Reserve Bank of India under the 2014 Depository Receipt Scheme. Under the scheme, shareholders can convert their existing shares into GDRs and list them on an overseas stock exchange. “What’s different is that earlier only companies were permitted to do this,” says Sumes Dewan, the founder and managing partner of Lex Favios. “Now this option is open to shareholders. We still need clarity on this but it promises to be quite a game changer.”
Private equity push
But some say the problem in the current environment isn’t necessarily an administrative or regulatory one. “I think the challenge right now is a lot of companies coming to market are private equity driven, and there may not be a public market for them,” says Bhakta Patnaik, a partner at S&R Associates. However, the cyclical nature of private equity investments means exits must happen. “Some are ready, but others are not and I think that’s a concern. Companies may need more time in terms of their structure, their governance, etc., before they and their shareholders approach the public market.”
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“Indian markets provide sufficient depth and liquidity,” says Sandeep Parekh, the founder of Finsec Law Advisors. He adds that low valuations in some instances are the result of fluctuation and volatility in the market rather than a lack of maturity. “We are one of the few developing countries which has a stock market capitalization that well exceeds our GDP … sometimes tens of billions [of rupees] in a single issue,” he says.
“A lot of new interesting industries – new energy companies, e-commerce, hospitals and healthcare companies – are now testing the waters for the first time,” says Chatterjee, who is working on an IPO for Prabhat Dairy – one of India’s largest dairy companies and potentially the first to list in India – as well as on the IPO of an e-commerce company. “That’s an interesting trend.”
Chatterjee says some of these companies were keen to list in the US or other jurisdictions because of a concern that the Indian markets did not have have the maturity in terms of investor profile to give them a good valuation. “But that’s changing,” he says.
Highs and lows
For an IPO, timing and pricing are as critical as valuation. “An overpriced issue will have trouble finding takers, which we experienced in the early part of this calendar year,” says Mukherjee. “An issue which is attractively priced will be oversubscribed.”
An increasing number of companies are filing a draft red herring prospectus with SEBI with a view to raising funds through an initial listing of equity shares. “We’re seeing a lot of newer young companies looking at listing,” says Sumes Dewan, the founder and managing partner of Lex Favios. “A lot of companies have commenced the process of IPOs and are going ahead with the process keeping in mind that there will be a much better time to come. They want to be prepared to hit the Indian market.”
“It’s not a euphoria-driven market – you can’t sell everything,” says Patnaik. “If you have a good company, there seems to be a market at the right valuation. But there are examples of deals struggling to get through the door at this time.” He says investor caution and objective valuation of issuers is a positive development and will eventually strengthen the market.
Although the bright lights of India’s election last year injected enthusiasm in the markets, those highs have been tempered by regulatory realities and business hurdles. Parekh says true market recovery will come only after solid economic gains and structural reforms in terms of ease of doing business. “That will be the inflection point when companies and investors will be gung-ho in terms of raising capital expenditure,” he says. “I would give it another two years till the primary market really picks up. Right now the primary markets – unlike the secondary markets – are still fairly comatose and trying to wake up.”
Planning ahead
While positive responses to offerings such as VRL and Inox Wind are encouraging, Chatterjee warns that unrealistic valuations could wreak havoc in India’s capital markets. “One of the reasons the last round of deals didn’t fare too well was because they weren’t priced right … so after listing, people lost money on those deals, which means retail investors started staying away from these IPOs,” he says. Although market sentiment has returned, Chatterjee says banks are struggling to ensure realistic pricing from the promoters and private equity players selling their stakes.
In addition, he observes a lack of activity in infrastructure and real estate deals. “Unless the brick and mortar companies come back strongly, we’re likely to see a bubble in terms of valuations and an unpredictably soft market in the short term,” he says.
For those who want to tap the markets, Lahoty suggests engaging with bankers and lawyers at least 12-18 months before they want to more formally kick-start the IPO process. “There are a number of things they need to plan from capital structure, to why they need the IPO money, to the corporate structure and the related issues around corporate governance which typically could take some time, especially if there are situations with mergers and amalgamations in the past, or changes in the structure of the group,” he says.
Chandra adds that engaging the right set of advisers is critical. “It’s never easy doing deals in India and if you don’t have the right set of advisers for that particular deal, and this includes auditors, lawyers, investment bankers, etc., it is difficult to get your deal done.”
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