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Access to the capital markets by Indian corporates received the shot in the arm it needed earlier this year in the post-election optimism which swept the country. Appetite for new paper is up, corporates are increasingly tapping high yield markets and equity markets are at levels unseen in the last couple of years (domestically, at least).
However, not everyone is convinced that the euphoria will last. The new government still needs to give clarity on the ways it will guide legislation and regulation. Changes to withholding tax and a hint towards a review of the Vodafone decision have given good indications, but the grittier detail on larger issues is still awaited.
The IFLR India Capital Markets Forum 2015 brought together key regulators with leading practitioners from banks, corporates and top international and local law firms to discuss the vital issues for raising capital in 2014 in a panel session format. They will also discuss opinions on where government policy is heading.
The forum discussed the best ways to raise capital in India, the ideal preparations for floating a company, how to access debt markets with high yield instruments and provided a comparison of the best methods of raising debt.
India securities market outlook
- Panellists agree that there are positive signs in the market, but they are waiting for the 2015 budget to determine the government’s investment future
- But unlike investment cycles in 2009 and 2010, investors are looking for meaningful stories and value from Indian companies; they won’t be investing with a portfolio approach
- The deciding factor on the use of Reits and offshore listings via depositary receipts will be clarity on tax issues
- Changes to India’s free float regulations will help smaller companies decide to IPO, but higher free floats are needed to boost market liquidity
- Panellists encouraged transparency, clarity and a more holistic approach to regulation – that regulators focus on encouraging investors, investors and other market participants to deepen the capital markets
Indian and international debt and equity-linked offerings
- The equity-linked space in India has faced some headwinds, and companies must start thinking about liability management sooner
- Changes to India’s withholding tax regime have helped bond issuance out of India, but the Reserve Bank of India’s (RBI) Circular 41 released late last year has added some uncertainty to the HY market
- Indian bond structures are stronger than Chinese bond structures because issuers and creditors have access to assets on the ground
- It’s important to remember that RBI has flexibility to change its regime: for example, its changes in overseas direct investment (ODI) regime from 100% to 400%, back to 400% after the rupee stabilised
- Potential issuers may come from the power, telcom and steel sectors, although a challenge may be the softness of commodity prices; infrastructure issuers are probably most obvious
Tapping the equity markets at home
- A new challenge in the Indian markets is that if a promoter changes the use of proceeds for the IPO post-listing, the promoter is under obligation to provide exit. But Sebi hasn’t introduced rules to determine how that works
- Lender consent for qualified institutional placements (QIPs) remains a challenging topic, but most advised taking a view on the risk depending on the amount of debt and potential cross-defaults. Risk factors aren’t always the solution
- Regulators have raised their expectations on in-house counsel and compliance officers, and they might need to pay more attention to accounting diligence in the future
- The new insider trading regulations require the board of directors to take a view on whether non-public information can be shared in terms of a transaction
- Questions remain around how regulations deal with PE-backed exits when a promoter is involved, and that will become more important as PE exits continue
Considerations for raising equity abroad
- The depositary receipt regulations released in 2014 were a welcome development, but pricing norms remains confusing
- But there haven’t been any ADR or GDR deals to test these regulations yet because QIPs involve a similar level of diligence and disclosure, and there’s been a lot of liquidity in the Indian market
- ADRs may be challenging for Indian companies, which are concerned about US class action litigation following the Satyam experience
- Indian companies are also concerned about potential takeover offers in their Level 1 ADRs, although functions available depositary banks can ease those worries
- The most critical factor to DR popularity will be how the Indian company plays out; if the economy does well, people may not look at it because they’re focused on the stock markets
High yield boost: When will India find its standard practice?
- The high-yield market in India is a very recent phenomenon. Aside from marquee names, Rolta became the first classical high-yield issuer from India in 2013
- Potential issuers will probably be at the high end of the high-yield credit ratings range because of RBI’s pricing requirements
- Greenko’s bond had an interesting structure; it’s unclear whether the RBI’s November 25 circular referred specifically to Greenko, but it’s unlikely that other issuers will utilise rupee-denominated bonds in their structures anytime soon
- But it’s important to remember that this is also uncharted territory for the RBI, which previously hasn’t had to regulate Indian companies issuing high-yield bonds
- Panellists hope that RBI would relax, if not scrap, its pricing rules, which would spark the development of the bond markets
Managing your liabilities
- Panellists see three types of disclosure: Regulation S, Rule 144A and so-called Super Regulation S, which involves more diligence and disclosure than typical Regulation S dealsIf Suzlon and Wockhardt’s restructurings hadn’t worked out and bondholders didn’t benefit, it may have seriously limited the convertible bond market in India
- Regardless investors are now asking more questions about foreign currency convertible bond offerings, and are more discerning. Issuers are also of a higher quality
- Indian corporates now understand the need for US reps and warranties; the problem now is that the wording differs slightly between banks, which can lengthen the deal-making process