India Capital Markets Forum: the highlights

Author: Ashley Lee | Published: 11 Dec 2013
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India securities market outlook

  • The outlook is unclear for India’s capital markets in 2014 - there’s no single view on whether there would be a breakout in the next few months or whether the country would cycle backwards. However panelists predicted a larger IPO volume in 2014 than what was seen this year;
  • There has been a serious lack of certainty in India’s regulatory, business and political environment. That has affected deal flow; market participants need yes or no answers, and more coordination between regulators;
  • The new Companies Act is generally seen as a positive, but requirements for valuation and a prospectus for each capital raise are execution concerns;
  • The draft real estate investment trust (Reit) regulations are a positive development, but it’s unclear whether tax regulations will come through. It’s also unclear whether heavily-regulated real estate assets will fit into Reits – infrastructure assets may offer more appealing yield;
  • Although a super-regulator has been proposed, a unified regulator is less important to practitioners than regulators that talk to each other at a senior level. Regulatory turf wars have created market uncertainty.

Debt and equity-linked offerings: new trends and restructuring in a difficult market

  • Expect to see Indian banks tap both the domestic and international markets in Basel III-compliant issuances, particularly for Tier 1 capital;
  • Indian issuers have looked at credit enhancement following Suzlon’s standby letter of credit (SBLC) backed deal this year, but the market has not seen copycat deals. This might be because Indian corporates considering debt are often drawn to loans;
  • Foreign currency convertible bond (FCCB) restructurings have primarily been related to distressed companies. But Indian corporates must consider liability management in non-distressed scenarios, and should look to Singapore issuers such as CapitaLand as examples;
  • Although Indian issuers cannot restructure their FCCBs more than six months before maturity due to Reserve Bank of India (RBI) regulations, they must plan in advance. International bondholders are much less willing to negotiate once the maturity date has passed;
  • As interest rates go up, convertible bonds will be more attractive. Expect to see more issuances in 2014.

International debt: high-yield boost?

  • In August RBI issued a circular stating an IndiaCo’s permitted total overseas direct investment could not exceed 100% of its net worth, without RBI approval; the previous limit had been 400%. This has heavily affected interest in bond issuances;
  • High-yield covenants are incurrence-based, while bank covenants are maintenance-based. Although maintenance-based covenants are more onerous, Indian issuers are not yet familiar with incurrence-based covenants;
  • Major Indian debt investors have investment caps for non-investment grade instruments, and would not be able to invest in high-yield debt in India at a level required to develop the market. Foreign institutional investors (FIIs) would need to develop this market;
  • But the probability of default for an IndiaCos is unclear, and losses from a default are also uncertain. Those uncertainties must be priced into the first issuances;
  • Although the US dollar market is the largest high-yield market in the world, IndiaCos should also look to the Singapore dollar market, which has a lot of domestic liquidity and supports smaller deals – S$50-100 million versus $300-500 million in the US market.

Moving on from Offer for Sale (OFS) and Institutional Placement Programme (IPP)

  • There’s been much more secondary market activity this year; the primary market has been very quiet. There have been few initial public offerings (IPOs) and almost no block trades;
  • The safety net mechanism has been a focus since it was introduced in JustDial’s IPO. But panelists weren’t sure whether it achieves the Securities and Exchange Board of India’s (Sebi’s) goal to avoid bad pricing in IPOs;
  • The implementation of the safety net has been difficult because the markets have been extremely volatile - an issuer will test the waters to get a sense of pricing before the IPO listing, and then there are another three weeks before the IPO is actually listed;
  • Panelists compared Sebi’s safety net regulation to the China Securities Regulatory Commission’s (CSRC) recent announcement on how it intends to regulate IPOs. They noted that unlike Sebi, the regulator is trying to establish that the market is mature enough to set IPO pricing;
  • Sebi is still biased towards protecting retail investors, but panelists also agreed that Sebi has been responsive towards market participants’ concerns and is more open to suggestions.

Viable overseas listing opportunities

  • Indian regulators have issued notifications allowing unlisted companies in India to list on foreign exchanges. This is likely due to recent rupee volatility;
  • However panelists noted that Indian companies must list on exchanges for which they have a nexus - for example, an Indian company shouldn’t list in Germany unless it has done a significant German acquisition or holds German assets;
  • Investors around the world are looking for the same fundamental growth story, so if a company isn’t ready to list in India it’s not likely to be ready to list elsewhere;
  • Although the US Jumpstart Our Business Startups (JOBS) Act has made listing in the US easier, it’s still much more expensive to maintain a US listing than it is an India listing;
  • However panelists expressed concerns that Sebi might turn around later and force foreign-listed companies to also list in India. They were concerned about liquidity being split, as well as the issuer being answerable to two regulators and two sets of filings.