As India’s equity markets stir, Nandini Lakshman investigates some of the recent deals, reveals the law firms that guided them and asks what’s in store for cash-hungry companies
It has been a modest but eventful couple of years for India’s capital markets, with a rebound on the back of the election of a new government empowered by an absolute majority in May 2014. Although the figures haven’t reached the exuberant buoyancy of capital market deals in previous years, there has been notable activity in different pockets as fund-starved companies grappled with swelling balance sheet deficits and few opportunities for raising fresh capital.
Corporate India has been weighed down by heavy loans and defaults on foreign currency convertible bonds. According to The Wall Street Journal, Indian infrastructure companies alone owe foreign lenders US$48 billion, the highest figure in more than a decade, while the Business Standard pegged India Inc’s total foreign debt pile at US$161 billion in September 2014.
However, over the past two years, a host of factors have stimulated Indian companies’ hunger for capital and demand for public issues. In the year to 31 March 2015 the number of initial public offerings (IPOs) rose to 47 from 41 a year earlier, according to deal tracker Prime Database. But while demand remained high, the total value of IPOs shrank to around ₹30.6 billion (US$462 million) compared to ₹89.8 billion earlier.
“Bringing an unlisted company to market in India has been fairly arduous, in general,” says Monal Mukherjee, a partner at Shardul Amarchand Mangaldas & Co (SAM). “Disclosure standards for IPOs as well as continuing disclosure norms for listed companies can be onerous. However, we have seen immense liberalization and reform in this space.”
Madhurima Mukherjee, a partner at AZB & Partners, adds: “The government in the last two years has tried to take a lot of steps towards ensuring the ease of doing business in India, which goes a long way in encouraging positive sentiment and confidence among investors.”
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Modifying measures
According to Manan Lahoty, a capital markets partner at Luthra & Luthra, deal activity climbed on the back of macroeconomic conditions and positive investor sentiment. The Securities and Exchange Board of India (SEBI) also made life easier for companies to tap the markets. “SEBI introduced new products, such as listings of real estate investment trusts, infrastructure trusts and also startups – each of which will further add to deal activity in the next year or so,” explains Lahoty. More recently, SEBI has sought to rationalize the disclosure standards for a public offering, which promises to reduce timelines, the cost of compliance and exposure to market uncertainty. “All of this allows larger participation by sophisticated investors in an IPO and also lends confidence to retail investors,” says Madhurima Mukherjee.
In October 2013, SEBI allowed small and medium-sized enterprises (SMEs), including startups, to list their equity shares on an SME exchange without the requirements of a typical IPO. This is in addition to the SME platform that allows listings through an IPO. SME participation “increases the investor base and visibility of smaller players, provides an exit opportunity for existing investors and access to new investors,” says Madhurima Mukherjee.
Bhakta Patnaik, a partner at S&R Associates, argues that SMEs should be allowed to list on the main board. “A separate platform in a developing market is currently premature,” he says. According to him, SMEs don’t need cash as they can access funds from private equity and venture capital funds. “What SMEs need is a platform to help them provide exits to their current investors,” he says. “And for investors, taking a company to a new Indian platform is a challenge. They would much rather list on the main board. Just Dial, AGS, Quickheal and Matrimony.com are examples,” he says.
Other measures adopted by SEBI include relaxing norms for IPOs and reserving a minimum of 10% of the offer for sale (OFS) issue size for retail investors with bid amounts of less than ₹200,000. This was done to embolden more unlisted companies to step up to the market.
In addition, to save time between the share sale and listing, SEBI approved the use of e-IPOs, and reduced disclosure requirements for group companies to minimize bulky documents. At the same time, it dropped its insistence on a “safety net” where promoters had to buy back shares if the IPO failed to sail through. To improve the quality of document disclosure in India’s litigious environment, SEBI is also working to reduce the disparities in disclosures related to assorted clauses of the equity listing regulations.
Action and activity
All these efforts have stoked corporate India’s thirst for capital and investors’ penchant for stocks, as companies raised funds from the domestic and overseas markets. The change in sentiment also sent companies scurrying around the world on a fundraising spree. From IPOs to qualified institutions placements (QIPs), and Indian and foreign institutional placement programmes (IPPs), big and small companies tapped every avenue to access funds. Citing market data for the 2014-15 fiscal year, approximately ₹280 billion was raised through QIPs, compared to around ₹60 billion through rights issues, ₹27 billion by way of IPOs and ₹4 billion through IPPs, says Kanga & Co partner Chetan Thakkar.
IPOs and rights issues typically receive responses from institutional, non-institutional and retail investors. QIPs and IPPs are designed for qualified institutional buyers. A leitmotif of these capital-raising avenues is institutional funding, which has been the key for success. In IPOs, for instance, some 50%-75% of the issue size is reserved for mutual funds, venture capital funds, foreign portfolio investors, insurance funds, alternative investment funds, etc.In India, the highest revenues generated through the IPO route from the beginning of 2014 to September 2015 according to data from deal tracker Dealogic were raised by Inox Wind (US$167 million), UFO Moviez India (US$95 million), Navkar Corp (US$91 million), Syngene International (U$86 million), PNC Infratech (US$76 million) and VRL Logistics (US$75 million). (For the top 30 IPOs during this period, and the law firms that ushered them through, see page 24.)
“Each of these offerings involves investors buying equity shares in a listed company,” explains Stephen Peepels, head of the US capital markets practice at DLA Piper in Hong Kong. “The different mechanisms are based on whether the company is currently listed, and if so, how the transaction will be marketed – with or without a full offering document.”
According to a market analyst, India has over ₹800 million worth of capital market issues in the pipeline. Dealogic data show there were 86 IPOs with a total value of US$753 million in the past two fiscal years.
“It has been a good 12 months for deal flow in the Indian capital markets, especially compared with the previous three years, which were pretty dire,” says Jamie Benson, a US securities law partner and head of the India practice desk at Duane Morris & Selvam in Singapore. The firm worked on equity offerings by 16 Indian issuers over the past 12 months, some of which are still ongoing. The firm’s deals include advising Axis Capital and JM Financial Institutional Securities on the sale of shares worth US$48 million in Capital First in a QIP including a concurrent US private placement. The firm is also advising SBI Capital Markets, Yes Bank, Elara Capital (India) and ICICI Securities on the proposed sale of approximately US$200 million shares in a power generation company through an IPO in India and concurrent private placements overseas.
One of Benson’s most memorable deals was the Snowman Logistics IPO and its international private placement where the firm acted as a special international counsel to the client. It wasn’t a large deal for the firm from a business perspective, generating US$33 million, but Benson and Snowman’s CEO, Ravi Kannan, share a bond after being holed up in Mumbai’s Trident hotel for 38 hours during the 2008 Mumbai terrorist attacks.
High hopes, higher hurdles
Patnaik at S&R Associates attributes the deal flow in the IPO market to private equity investors wanting an exit. “Investments made in 2010-11 had reached the exit timeframe,” he says. “This has been the single largest reason for IPO activity.”
For some IPOs the going was tough. Many private equity-backed IPOs were forced to slash their offer price and even stretch the closing date to sail through. Patnaik believes that a lot of companies which struggled may not have been ready to access the markets but an exit strategy may have forced them to go public. “The quality of the company’s business is being considered more closely by investors – it’s not euphoria driven,” he says. “In the long run, I believe this will be good for the Indian markets.”The table on page 24 includes several IPOs in the entertainment, e-commerce, logistics, human resource, food and beverage, and apparel arena. “The boost in investor sentiment has led to companies from non-traditional sectors taking the leap of approaching capital markets,” says Thakkar at Kanga & Co.
Adds Benson: “Although the Sensex is not too far off its all time highs, investors seem to be reluctant to invest in IPOs at the moment and seem to be favouring investing in those companies that are known quantities.”
Take for example the private equity and venture capital players that ushered companies such as Monte Carlo Fashions down the IPO aisle. US-based private equity firm Samara Capital acquired an 18% stake in Monte Carlo Fashions – owned by the north India-based Nahar Group – in mid-2012. When Samara sought an exit, the apparel company took the IPO route, signed up with Amarchand Mangaldas (now SAM) as the issuer’s counsel and took a bow on the bourses in December 2014 at ₹584 per share. A tepid market response to the issue forced the company to slash its issue price by 10%, making Monte Carlo Fashions the first company in the last fiscal year to go public at a discount.
“Smaller deal sizes this year indicate that investment banks are being cautious, likely in view of recent market volatility and uncertain valuations,” says Monal Mukherjee at SAM. “A host of macroeconomic as well as company-specific considerations can alter the balance between investor appetite and deal volumes, or, in other words, the demand-supply curve, based on which the market evolves,” she adds.
More recently, CAM, Squire Patton Boggs and J Sagar Associates advised on Prabhat Dairy’s US$54 million IPO, which made it the first dairy company to list in India. But listing the company had its own challenges. Poor demand forced Prabhat Dairy to slash its IPO price to a band of ₹115 to ₹126, from the earlier band of ₹140 to ₹147 per share. With only 42% of the issue covered by the fifth day, the company’s private equity investors – India Agribusiness Fund and Proparco, the private sector investment arm of Agence Française de Développement – both sold some of their shares through the IPO. The issue finally scraped through when the private equity investors reduced their OFS shares.Amusement park operator Adlabs Entertainment offers another example of this uncertainty. The company encountered a lukewarm response to its IPO, reaching less than half of its ₹4.5 billion target. Adlabs then slashed the offer price by 20%, extended the closing by three days and sailed through on the final day with 10% oversubscription. The company was advised by SNG & Partners and Bharucha & Partners, while Amarchand Mangaldas – now Cyril Amarchand Mangaldas (CAM) – and Jones Day’s Manoj Bhargava and Jeffrey Wang from the firm’s Singapore and Taipei offices respectively, represented the managers – Centrum Capital, Deutsche Bank and Kotak Mahindra Bank.
“Small size IPOs go through with local investors participating,” says CAM’s Cyril Shroff. “For larger issues, one would need to attract global investors. And the world markets have been very choppy over the last year”.
Pursuing a popular path
The flavour of the year, however, was QIPs, which were introduced in 2006 to wean Indian companies off foreign capital and provide another path for companies to raise funds, mostly to meet working capital requirements, finance expansion and refinance debt. In the 2014-15 fiscal year, there were 44 QIPs according to Prime Database. Typically under the QIP process, securities are issued to only qualified institutional buyers such as mutual funds, banks, insurance companies, venture capital funds and foreign institutional investors on a private placement basis.
Top 30 IPOs in 2014 and 2015 (to 30 September)
Lahoty adds that the QIP route allows a quick and efficient way to raise capital without making a follow-on public offering, which in most cases would require SEBI approval and entail a time-consuming and expensive process. “Institutional investors looking to build a significant position in a stock may not be able to do so in the open market without significantly increasing market price and their acquisition cost,” he says.Lawyers say that issuers favour QIPs because they are the easiest option and there is no review of the pricing or the offer document by any securities regulator, which means that they can get to the market much more quickly. “A QIP can be done in six or seven weeks from kick-off whereas a GDR [global depository receipt] or ADR [American depository receipt] offering takes at least three months,” says Benson. “When the markets are highly volatile, as they have been over the past year, issuers want to be sure they can get the deal done, which makes them favour QIPs.”
Idea Cellular took this route, with pricing being the main driving factor. The company raised US$510 million to fund the purchase of fresh spectrum for nine telecom circles where its licences are expected to expire. CAM, AZB and Jones Day advised on the deal.
A QIP by IDFC, aimed at reducing the foreign shareholding in the company, was unique in that it entailed selling the concept of a bank which hadn’t commenced operations. IDFC and its advisers deliberated the manner of fundraising at great length, explains Madhurima Mukherjee of AZB.
The popularity of QIPs brought some large companies back to the fundraising table and helped restore investor confidence in the equity market. The largest QIP since the start of 2014 was by State Bank of India (SBI), advised by Allen & Overy. The documentation was done over the Christmas and New Year period at the end of 2013 and the deal closed in early February 2014. But despite the speed with which it was done, the US$1.3 billion deal was no cakewalk. “There were interpretation issues between the Companies Act and the statute under which SBI is constituted,” says Allen & Overy partner Amit Singh. “The auditors were new to the process and acting as the sole international counsel in this offering (which also involved a US private placement) meant that we had a tough task of managing all constituents.”
The biggest QIP in 2015 so far was by HDFC, a leading private sector bank. The ₹100 billion deal was complex, primarily because it was coupled with a simultaneous ADR offering. Synchronizing the issue timelines across different jurisdictions was a challenge for adviser AZB, as was the requirement for the QIP to only be marketed to domestic investors on account of the foreign shareholding levels in the bank. “The pricing for this transaction was also fairly unique, since it was priced at market price, as opposed to the typical pricing of QIPs, which takes place at a discount to market price,” says Madhurima Mukherjee. Other advisers on the QIP were Cravath Swaine & Moore, and Davis Polk & Wardwell.
A US$325 million ADR issue by logistics company Videocon d2h was the largest Indian issue in the US since 2000. However, response to a new scheme that allows for unsponsored depository receipts has been tepid. A big limiting factor is tax, points out Sangeeta Lakhi, a partner at Rajani Associates. “There’s a capital gains tax to be paid when a GDR is converted into shares,” she says. “And even when the shares are sold, there is no proper clarity on such deals.” Also, Madhurima Mukherjee notes that any shareholder can initiate the scheme in a foreign jurisdiction without the company’s knowledge or consent. “This has created a bit of unease and uncertainty amongst various Indian companies about exposure to foreign laws and liabilities,” she says.
Depository disorder
Patnaik says that SEBI is yet to provide certain operational guidelines on the scheme. “The depository needs these guidelines, particularly in sectors where there are foreign shareholding limits,” he says. “That seems to be the only regulatory issue pending.”
Others believe that the overseas listing scheme is an admirable regulatory initiative, which has generated a fair amount of interest. “In fact, this goes hand-in-hand with the Reserve Bank of India’s announcement of a framework governing overseas issuance of rupee denominated bonds by Indian companies,” says Monal Mukherjee at SAM. “The liberalized policy framework for Indian companies to tap international markets expands fundraising options for Indian companies, particularly in the IT-enabled services and clean tech sectors, where valuations overseas have typically been good.”Peepels thinks most Indian companies may have shunned depository receipts because they think that the cost and effort associated with a depository receipt offering and listing outweigh the benefits. “Issues such as taxation, exit for existing shareholders, impact of the new Companies Act and clarity on SEBI’s role remain,” he says. Shroff suggests it would be helpful if the tax on depository receipt sales was similar to share sales in an Indian IPO, which attract a securities transaction tax, but no capital gains tax.
IPPs have been another source of fundraising for Indian companies over the years but they seem to have passed their use-by date. While 11 IPP issues fetched a total of US$796 million in fiscal 2013-14, there was just one US$69 million IPP issue by Muthoot Finance in 2014-15.
Somasekhar Sundaresan, a capital markets partner at J Sagar Associates, says that despite the initiatives to spur the market, a lot more needs to be done. As a member of a high-level committee that is reviewing SEBI’s regulations, he thinks that the regulator’s guidelines require unprecedented reassessment and redesign, as there is still a wide gap between what regulatory reform requires and what is being done.Patnaik explains: “IPP is a very specific product which was allowed in a limited timeframe to enable listed companies to meet the minimum public shareholding requirements,” he says. “It was essentially a QIP, but was structured as a public offer whereas a QIP is a private placement. The investor base for both QIPs and IPPs is the same. This class of investor likes to invest in listed companies and gets an immediate discount to trading price and is likely to exit having made the arbitrage.”
“If regulations precede market developments, innovation can get stymied,” says Sundaresan. “One has to carefully guard against the common man on the street being taken for a ride, but we have lost the differentiation between the small investor and the big boys and bring to bear identical measures to protect each of them.”
For example, he points out that regulations governing alternative investment funds are structured in a manner similar to those governing mutual funds. “There are no de minimis exceptions to the general application of consumer protection regulations.
“Likewise, there is an overwhelming fear of investors in the primary market losing money on IPO valuations and yet nothing structural has been done to make the IPO market an institutional one. The entry barriers for IPOs have been set so high that barely a handful of new businesses got listed on our public markets in recent years. These are all examples of the need to work on a metamorphosis,” he says.
If the rule makers take into account such recommendations, a level playing field for companies of all sizes across sectors could be a reality in future and a solution to boost activity on the bourses.
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