The India Capital Markets Forum took place on January 18 2017 at the Four Seasons Hotel in Mumbai. They key takeaways from each session of the agenda are detailed below:
Securities market in India: an overview
The overall private equity market in 2016 saw half the levels of 2015, reaching around $7billion. The IPO market saw more than 25 issuances, which was the best year on record since 2010. There were a number of first IPOs in the insurance and healthcare markets.
Almost 90% of the money raised from public offerings came from sell-offs, with shareholders, promoters or private equity investors looking for exits since 2010. While $4 billion was raised through IPOs, very little was raised for new capital. Last year, private equity-led investments in India fell by 30% but exits by private equity increased by almost 10%.
The total volume of money raised in 2016 may have been lower than in previous years but the quality of issuances was good, with a lot of first time issuances. On the debt side, there were a lot of structured transactions like Delhi International Airport’s $500 million masala bond or Greenko’s $500 million high-yield green bond. There were many notable high-yield issuers such as UBM, and so the quality of the debt increased.
Indian equity market: key trends in listing
In the past year, several companies without identifiable promoters have either listed or filed their draft documents with the Securities and Exchange Board of India (Sebi). This shows a change both in the type of companies approaching the regulator (diverse shareholding) and the regulatory mindset being more flexible.
In the earlier Companies Act, there was no concept of independent directors and their responsibilities. The new Companies Act of 2013 defines what an independent director is, and also expands role and responsibilities. This has resulted in independent directors and investors asking more questions on matters such as insider trading and corporate governance.
The current listing regime has created problems for companies seeking to go public, as they have to make the decision of whether or not they are selling IPO shares almost nine months before the fact without any clarity on price. In other parts of the world, companies will be able to go through the whole process, get realistic price indications based on conversations with potential investors before making an informed choice about how much they want to sell initial shares for.
The extent of documentation for a public float is excessive, and this has been a subject for debate in many conversations market participants have had with Sebi.
India, while facing issues over taxation of investors of real estate investment trusts (Reits) and contribution of assets into a trust, is home to $180 billion worth of real estate assets. Around $50 billion of those assets is in some form eligible to be put into a Reit and the supply is significant, according to a report.
The infrastructure and the real estate space in India remains undercapitalised and heavily debt-laden, and therefore these sectors are in high demand for capital. The obvious source of capital is equity in the region and infrastructure trusts are channels to be tapped.
Both Malaysia and Indonesia have in recent years revised their Reit guidelines to adjust the amount of the Reit that can consist of assets under development. This is a classic trade-off between risk and return to allow a greater percentage of assets going into the Reit.
While India hasn’t seen any Reits come on board, there have only been three Reit offerings in Singapore and one in Hong Kong - the overall offering volume in Asia has remained low.
There is no regulatory requirement made mandatory under the law for a right of first refusal clause to be put in a Reit, but whether one is and should be included in the deal is subject to whether doing so will add value to the transaction.
High-yield: challenges and opportunities
India has always been active in the offshore, US dollar-denominated bond market. But the offshore issuances of US dollar-denominated debt of public sector banks, government-owned corporations and blue chip companies, because of their financial profile and standing, are always done on a covenant-lite basis (if covenant-based at all).
In the second half of 2016, there was a strong uptick in the high-yield bond market with $5 billion worth of high-yield bonds sold by Indian corporates. Globally, according to Bloomberg, there is about $10 trillion worth of debt that has negative yields and held to maturity.
A common misconception surrounding Indian credit is that Indian companies are riskier and don’t accept covenant packages that would protect investors from default risks. Based on Moody’s four core matrix, including the company’s ability to pay restricted payments and make investment into non-core businesses, Indian borrowers have been shown to have some of the strictest covenant packages together with a lower rate of default.
There is a consistent level of distress in India and, despite some problems being resolved behind the scene by way of restructuring and side deals, the country saw INR6.7 trillion ($100 billion) worth of corporate debt in default. Some 240 of the top 500 borrowers are either in distress or at elevated risk of refinance.
Defaults have been broadly spread across Indian issuers in that, in addition to the classic default where the issuer isn’t able to pay the principal on its bond, there have been cases where foreign-currency convertible bonds where the bondholders have exercised their conversion right and the Indian issuer has refused to give the shares.
Tapping into the offshore and onshore debt markets
While there has been a lot of activity in the offshore dollar-debt space, one of the major flaws in the domestic rupee-debt space is that the lack of a market for companies that are genuinely below investment-grade.
A lot of talk has taken place on the possibility that there will be uniform taxation for all kinds of offshore bond issuances and, if that happens, it would be a boost to the offshore rupee and dollar-debt markets.
Last year was one characterised by a flurry of regulatory changes in both the onshore and the offshore debt-raising space, no least with Sebi’s latest guidelines permitting well-regulated foreign portfolio investors to trade directly in corporate bonds without any broker and to invest in unlisted securities.
In an attempt to address existing liquidity issues, the Reserve Bank of India (RBI) moved to lift a decades-old ban on Indian banks to tap both the onshore corporate bond market and the offshore rupee and dollar-debt market.
While $5 trillion worth of rupee-denominated bond issuances took place in the market last year, with the onshore debt market advancing from the plain vanilla bond, there remains a lack of hedging mechanisms, especially when it comes to the onshore corporate bond space.
Due diligence standards
India has a disclosure-based regime and Sebi requires line-by-line review of pre-IPO documents. The regulatory emphasis is on diligence.
In the regulatory context of Indian IPOs, in theory, if there are due diligence findings, the regulator will only require disclosure in the offering document. In practice, there is an unwritten expectation on the part of merchant bankers to be gatekeepers of the IPO due diligence process. If a banker has identified some deficiencies in the company but they are not enough for them to disclose, it is important to make sure that they are classified as risks before the company proceeds with the offering.
Two new sets of laws, one of them the new insider trading regulations and the other the new listing obligations, have come into effect in the last two years with the stock exchange being given greater power to enforce compliance with the said laws.
With greater access by the public in India to information on domestic corporates, it is no longer enough for a company seeking to go public to simply produce a comfort letter, hire the right external expert, and use them as an excuse for not stepping up due diligence.