Aiming High

Written by Sarika Malhotra | Sarika Malhotra | Updated: Jun 14 2010, 03:49am hrs
Even as the Essar Energy IPO was a stellar at the London Stock Exchange, raising $1.9 billion and becoming India Incs largest-ever overseas listing, there were some India-related companies on LSEs junior exchange that created quite a stir. KSK Power Ventur and Great Eastern Energy Corporation slowly yet steadily progressed from the Alternative Investment Market (AIM) to the Standard Listing on the LSE and Greenko managed a follow-on fundraising of $111 million at the AIMLondon Stock Exchanges global market for innovative and growing companies. Even as the biggest draws at the AIM have been clean technology, renewable energy, natural resources, real estate and financial services, not many know that till recently, the junior exchange was scouted by Amitabh Bachchan for his production company, AB Corp. AIM has also attracted India-related media firms such as Eros International and the Indian Film Company, raising $50 million and $110 million, respectively. According to Grant Thornton index of London-listed India-related stocks, the India Watch Index, since its inception in 2007, has gained 70% and was up 8% in Q1-2010. Interestingly, the best performing India Watch stocks in the first quarter of 2010 were all from the AIM, Greenko Group, DQ Entertainment and Unitech Corporate Parks, raising 41%, 39% and 35%, respectively.

Advantages beckon

For Major Manjit Rajain, executive chairman, Mortice, AIM was a well-thought decision. After a seven-year stint with the Indian Army Rajain founded the Peregrine Group, a security service provider,15 years back. After venturing into real estate with Tenon Property Services, Rajain decided to set up a facility management company and that led him to the AIM. We explored the PE option. But the investments and valuations didnt work out. The pound of flesh the PE guy wanted was much larger than his contribution to the company. He explored the BSE as well. But that required a certain capitalisation and profitability level. And to be honest, it didnt offer much to the smaller companies. I went around Bombay, but it was very difficult to sell my story. People could not relate to security service business and facility management, he says.

A fact also corroborated by Girish Bisht, senior research analyst, International Institute of Financial Markets (IIFM). Comparing the listing requirements at AIM vis-a-vis BSE, Bisht says for young companies, there is a definite advantage to list at the AIM. No minimum market capitalisation is required at AIM, whereas for BSE, minimum market capitalisation is Rs 25 crore for large cap companies and Rs 5 crore for small cap companies. In AIM, no prescribed level of public holding of shares is required, whereas at BSE minimum number of public shareholders after the issue should be 1,000. For BSE, the minimum income/turnover of the company should be Rs 3 crore in each of the preceding three-12 month period, says Bisht.

Rajain shares that the listing process at AIM is beautifully regulated. There were similar companies listed on the exchange, so there was no problem in selling the idea. In fact, there was considerable interest from investors who were mature in dealing with the concept . It took us just three months to go through it. After narrowing down on the nominated adviser (Nomad), things were very smooth. The Nomad helps with every documentation, keeps you updated, sends reminders if you are getting late. Every press release goes through them. Corporate governance norms are very strong. The roles of independent directors are well spelled out and the Nomad explains to the directors their responsibilities, he says.

Rajain adds that the advantage is that everything is IFRS-compliant. So it prepares you well for every stage. We have a small investor base and they know you individually, they call up and check how is the company doing. After the listing, the AIM does not put much pressure on the company; you can make half-yearly disclosures. It prepares you for the bigger market.

Rahul Chattopadhyay, associate director, PwC, points out 2006-07 attracted huge interest from new-age companies, as the AIM is geared for companies with no solid financial histories and companies which are even a year old can also access the AIM. The exchange puts huge responsibility on Nomads who have to adhere to considerable due diligence norms for the companys listing. Chattopadhyay explains that three reports are prepared for the comfort of Nomad, enabling it to prepare for the listing, which are not made public and go a long way in helping the company getting used to international working standards. The Long Form Report essentially contains the historical performance, HR policies, and tax details; The Working Capital Report spells out how the company plans to manage its finances and working capital in the coming 12-18 months; The Financial Reporting Procedures Report deals with internal controls, working and process management, lays down the role of the Board and independent directors.

Amit Khandelwal, partner, Transaction Advisory Services, E&Y, points out that India-related oil and gas companies have done considerably well at AIM. Indus Gas, listed in 2008, has generated 120% return for the investor. Great Eastern Energy Corporation, listed in 2005, managed a 278% return. KSK, listed in 2006, generated a return of 378%. Khandelwal adds that the energy sector has performed well at the back of strong operational fronts. Eros International over the past year gave close to 50% returns to the investor. Real estate was the only sector that performed badly, on account of the global slowdown.

Overseas listing enables access to a deep pool of investors who understand the sectors where risk is high and are willing to participate in a high growth and high risk story. As gestation period of these businesses is long, it calls for a mature investor. The exit option for shareholders is also very structured. It gives the company access to marketable currencies that help in overseas acquisitions and expansion. Companies get better valuations at international exchanges as compared to Indian ones, which at times do not reflect true value, says Khandelwal. Noida Toll Bridge Company, too, swears by the exchange. Even though the company was already listed on BSE and NSE, it became the first listed Indian company to successfully complete a follow-on public offer in the AIM and managed to raise $50 million via GDRs. While comparing the fund raising process at AIM and India, NTBCL sources point out, Indian regulations on corporate governance are fairly comprehensive and similar to the AIM regulations. The Insider Trading Regulations on the AIM are, however, stricter, especially in terms of time lines, as are disclosure norms for directors. The recent Rule 26 introduced by AIM also requires substantial disclosures to be made on our website. The major area of difference lies in the speed in which the GDR was accomplished. The initial conversion to IFRS was time consuming and tedious. Other than that, our advisers and intermediaries were highly competent and the process was completed pretty painlessly.

Stepping stone

Experts say AIM has become the most preferred platform to raise capital for young companies. Mahad N, partner, Specialist Advisory Services, Grant Thornton, says the AIM market has been designed keeping in mind growth-stage companies. It provides a balanced regulatory framework suited to the needs of growing companies with the benefits of a publicly quoted security, no restrictions on follow-on issues making secondary fundraising very quick.

The exchange provided the perfect platform for follow-on fundraising in the first quarter to the Hyderabad-based Greenko Group focusing on developing clean energy assets. Greenko raised $65 million in a November 2007 IPO on AIM, and raised a further $111 million in February this year by offering new shares. Anil Kumar Chalamalasetty, CEO and MD, Greenko, says, AIM is a good platform to raise capital for high growth and start-up ventures, which we were in 2007. Ours being a capital-intensive business model, AIM was more effective for us when we did secondary offering in January 2010. Chalamalasetty adds, Capital raising is not a problem for growth companies once a good business model is established, but the challenge in these markets is valuations, because the market considers not only the business risks, but also the external risks factors. Capital market places like AIM prepare growth companies towards matured exchanges in respect to good governance processes and practices.

Mahad adds, The fundraising mechanics on AIM are driven by two key factorsit is a self-regulated market and it does not have restrictions on minimum public float fundraise. Therefore, the mechanics are similar to that of raising private equity funding and not directly comparable to a listing on BSE/NSE.

While comparing the money-raising mechanics at the AIM and PE, Jai Mavani, executive director, KPMG, says, Private equity enables a very structured market transaction, and is linked to various conditions and options. But the AIM provides pure straight equity. In PE there is considerable control exercised by investors with attached conditions. AIM is a non-interfering process and perfect for small ticket size listings.

As per reports, seven Indian companies are planning to tap the AIM to raise capital in 2010 and of these, two companies would get listed shortly. Reportedly global financial services provider Religare Enterprises will act as a nominated adviser to three of the seven companies from power, mining and renewable energy sectors. A recent entrant on the AIM has been Indian Energy, a power producer and operator of wind farms in India. Rupert J Strachwitz, chief executive, Indian Energy, points out that the company has the distinction of getting listed on the exchange in 2009, a year that made financial history for all the wrong reasons. Indian Energy was incorporated in 2007 and we soon realised that in order to grow, we will have to go public at some stage. Our business was growing and we needed the money for expansion. And 2009 seemed to be the right time to hit the market. We knew we were not creating anything new, it was just a tough market that we were entering. We were too young for BSE and looked for alternatives and AIM became the natural choice, he says.

Strachwitz affirms that the biggest advantage of AIM is the presence of experienced small cap fund managers. The biggest draw has been how supportive institutional shareholders are of growing businesses, they interact on a regular basis and that enables more interaction with the market place. In our bi-annual presentations, its great to have support and feedback of shareholders, especially for a young growing company. There were less hurdles, it was much more an educational process. It prepared us to build the business and how to interact with the market.

Taking a cue from AIM, Indian stock exchanges reportedly have made some beginning by sponsoring research from independent agencies for less liquid companies not traded and not researched by analysts. Experts opine that after the lull of 2009, the India story on AIM has started picking up, as the broad macro economic credentials in India remain strong. Even through IPO activity in India is buzzing, going forward, the absence of a market in India focused on growth companies, shall continue to make AIM a preferred destination to access capital markets.