IFLR India Capital Markets Forum 2016 - Key Takeaways


January 21 2016 | Four Seasons, Mumbai



The India Capital Markets Forum took place on January 21 2016 at the Four Seasons Hotel in Mumbai. They key takeaways from each session of the agenda are detailed below: 

Investment appetite: India securities market outlook

  • Before Modi’s government India was returning on growth, but not on capital. Now Indian banks are better capitalised than ever before
  • 2016 will be a year of continued volatility, but for well-performing companies IPO windows will materialise. This year sees a more discerning investor
  • Amendments made to the Companies Act in 2016 have had a big impact, particularly those around disclosure requirements and accounting standards
  • India’s new listing platform for start-ups is encouraging but hasn’t produced the success stories many expected
  • There are few stand-out benefits of listing offshore nowadays if a company is not already listed in India. It just drives up costs

Domestic listings vs raising equity abroad

  • Sebi recently simplified its portfolio investment scheme significantly which has been very positive as that’s where a lot of money comes from
  • Sebi’s new approach – entering into regular consultations with the market – is encouraging and has had positive outcomes
  • New listing requirements (as of September 2015) are expected to put international investors’ minds at ease
  • India is certainly still the flavour of choice for Indian companies going public, though the fact there is a choice is very positive
  • Companies are mistaken for looking at listing in the US purely for regulatory arbitrage reasons
  • Financial reporting requirements are daunting for start-ups who may not have a track record of five or even three years
  • New transparency requirements have good intentions but different departments at the regulator interpret rules differently and this leads to disparities in approach

Liability management in India

  • The market has always been reactive to market stress in India when it needs to be more proactive
  • Learning from mistakes in other jurisdictions is helpful. For example, Chinese regulators don’t let the market take its own course and ‘zombie’ companies exist purely because the authorities won’t let them go
  • In recent years there has been a heightened focus on restructuring debt. High levels of deleveraging are expected in the next few years as banks start to feel the pressure
  • Engage with lenders early in times of distress. Some companies wait until four weeks from the maturity of the instrument. Four months would enable a more meaningful solution
  • Banks are lenders and in the absence of a bankruptcy code they are being forced to step in and take control of struggling companies
  • In terms of insolvency, the judicial process has been very slow so far. Hopes are high for a new formal bankruptcy law

Diligence standards

  • Sebi’s recent clarification of what constitutes a materiality test has been welcomed by the market. It is ‘whatever the board of directors continues to be material’, so provides for much flexibility
  • From the day you go public, you must apply the same materiality test to any future litigation. It’s not a one-off for IPO purposes so keep that in mind when completing it initially
  • This applies to any future fundraising too. “The threshold you set for yourself will not evaporate overnight”
  • Every factor, both quantitative and qualitative, has to be justified. Always err on the side of caution – a conservative approach is far preferable to an aggressive one
  • DLF case in 2007 set precedent. Its managers did not disclose certain connected entities as promoter group companies, even though these companies had been sold to the wives of DLF’s managers. The judge ruled Sebi was wrong for penalising DLF

Indian debt market: key trends in offshore financing

  • QE has effectively flushed between $7 - 8 trillion into the global financial system and investors have had to find new homes for it
  • Indian companies wishing to access offshore financing are heavily regulated making it less appealing
  • Interest in Indian securities has kept it head and shoulders above other emerging markets, though it is held back by regulatory hurdles
  • The advent of masala bonds is exciting for all but their success is held back by 5% holding tax and volatile exchange rate
  • Liberalisation on end use of funds rules for masala bonds has greatly improved their appeal and companies are far more optimistic about them
  • Their success is also held back by restrictions on exiting early and selling to a local investor. Minimum of five year requirement means global investor must find another global investor
  • Not giving investors that flexibility means they see it as an illiquid investment which needs a premium as much as ten times higher
  • NCDs are also attractive because they only require rating from one agency. Masala bonds require at least two offshore ratings. The minimum average maturity is also three years

Adverse developments in high yield bond markets in India

  • High yield is still restricted by Indian regulations which are onerous as to what you can raise, end use of the proceeds, tenor and pricing. All these factors are a critical dictator of volumes
  • Investors want to see an Indian sovereign on paper or an investment grade asset taken to market first because they can prescribe value to that paper. Then they’d potentially look at high yield
  • The HY floodgates won’t be opening any time soon, but there is some interest in smaller deals
  • Reform of Indian bankruptcy law is essential, especially making it more accessible to bondholders
  • Often issuers will agree to covenant packages without understanding the restrictions. Better education is needed

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