The Indian equity markets have been subdued over the past few years and investor response to most IPOs has been tepid. In fact, a sharply declining trend in domestic IPOs is visiblewhile a total of R37,500 crore was raised in 64 IPOs in 2010, 2013 till date has witnessed only 24 companies raising less than
R1,500 crore. Given this background, while Indian companies across sectors have been struggling to raise fresh capital, private equity investors on the other hand, were anxiously awaiting an exit. Promoters and investors alike were eagerly awaiting this relaxationlets see if everyones prayers have been answered.
The notification is pretty straight forwardit permits unlisted Indian companies to list in overseas countries compliant with IOSCO/ FATF or where Sebi has bilateral agreements, which ensures applicability of high governance and control standards. Most of the key global markets such as the US, Luxembourg, Singapore, Netherlands and London are covered by these bodies. However, the government is permitting this window only for two years, which could mean that its a temporary relaxation and not a structural change for the long term.
The notification requires the issuer company to comply with the FDI policy in force during any overseas listing, which is logical. However, one needs to see whether there is a ceiling on the proportion of foreign investment raised via this route (akin to the current regulations governing GDR issues) or if it will be a free window.
The notification casts a requirement on the company to file the overseas returns with Sebi as also comply with Sebis disclosure requirements; this casts an additional burden on issuer companies which will anyway be bound by a fairly stringent international regulatory framework. Given that Indian investors will not be participating in such a public issue, one wonders whether the Sebi-related compliances are really warranted.
One of the conditions in the notification that has everyone speculating is the one relating to end use of funds. It provides that funds raised can only be used to retire outstanding overseas debt or for overseas operations, including any acquisitions. Furthermore, unutilised funds need to be remitted to India within 15 days and can only be deposited into designated bank accounts. This raises several questions for promoters and investors; for example, does the listing provide liquidity for all shareholders of the issuer company (like a conventional Indian IPO) or is it going to be a GDR sort of issuance where only the GDR holders have liquidity. Private equity investors looking for an exit will be disappointed if its restricted to a primary GDR type structureof course, one has to wait for the detailed circular to see if secondary sales are possible too. Will listing be permitted for all capital instruments or will it be a depository receipt sort of model only; if so, a related question is whether complete two-way fungibility will be available for investors.
In terms of motive, it appears that one of the primary drivers is to help companies deal with the crushing burden of foreign currency denominated debthowever, a number of large companies, particularly those connected to infrastructure space are already listed in India. So, one is not sure if this relaxation provides additional succour since the India-listed players could have listed overseas anyway. The other big factor is that overseas acquisitions funded by Rupee resources exert downward pressure on the domestic currencythis relaxation will help Indian companies de-risk such investments by the use of overseas capital and help the Rupee arrest its resolute slide. Again, most of the large players (e.g. IT players) or large Indian groups have listed entities in India which could raise overseas capital anyway.
In summary, there is no doubt that this is a welcome relaxation that will go a long way in helping Indian companies de-leverage balance sheets and raise fresh capital. The ability to list on international exchanges will help Indian businesses attract seasoned investors with the ability to understand and value unique business models. Sectors such as high technology, internet, healthcare, energy and infrastructure are likely to be key beneficiaries. The notification does not specifically enable Indian companies to finance their local operations in India or repay debt owed to local Indian banks. However, before coming to any judgement, one needs to await the detailed circular from the DIPP/ RBI to comprehend the full impact of this notification. But, given the Indian economys dire need for long term capital, one wonders what else needs to occur before Indian companies have unfettered authority to list on overseas exchanges without any attached conditions.
Rajendra Nalam & Vaibhav Gupta
Nalam is partner and Gupta is senior vice-president, BMR Advisors. Views are personal