The Alternative Investment Market (AIM) of the London Stock Exchange (LSE) has gained wide popularity and has caught the fancy of many small and medium enterprises (SMEs) throughout the world as an alternate avenue for raising capital. With growing integration and close co-operation among global financial institutions and capital markets, Indian companies too have joined the party and are looking at AIM as an attractive market for their capital mobilisation plans. Since its launch in 1995, over 2,600 companies from various industrial sectors across the globe have joined AIM.
So far, there are about 25 Indian companies listed on AIM, including Eros International, Hardy Oil & Gas, Hirco, Unitech Corporate Parks, Promethian India, Trinity Capital, KSK Power Venture and Ishaan Real Estate among others. The total market cap of these 25 Indian companies as on April 30, 2007 was around GBP 3 billion. The question is why are Indian companies flocking to AIM when there is a robust, booming and vibrant capital market in India, catering to the needs of sectors across industries unlike other emerging markets. More importantly, the Indian capital market is one of the best globally in terms of corporate governance and transparency issues, helping India in receiving large amount of portfolio investments compared to other emerging markets.
The proponents of AIM are citing the same reasons when arguing for Indian companies to approach AIM to raise funds. Many SMEs, which require growth capital, may not be able to adhere to the strict regulatory environment in India and hence see AIM as an alternative platform to raise funds that offers wide flexibility. The main advantages of AIM are its lower entry and maintenance requirements for listed companies. For instance, there is no need for a trading record, minimum shares don?t have to be put in public hands, prior shareholder approval isn?t necessary for transactions and no minimum market capitalisation is required.
According to Girish Nadakarni, executive director, institutional sales, IL&FS Investmart,? Indian companies approach AIM as they are able to get better valuation in certain sectors which they are not able to get in India. Each company gets listed on AIM on a structural basis according to their own needs and requirements. There has been a strong need for an alternative trading platform for SMEs domestically but lack of it is prompting more and more Indian SMEs to opt for foreign listing and hence policy makers should look into the Indian alternative of AIM.?
The ministry of finance (MoF) and capital regulator Securities and Exchange Board of India (Sebi) guidelines stipulate that those companies going for offshore listing should have prior primary listing in India.
But seeing the way the Indian companies have approached the AIM market by floating their offshore subsidiaries in some of tax havens like Isle of Man, Cayman Islands, British Virgin Islands and routing the money back to invest in India has raised many eyebrows about the real intention of these companies. This was what prompted Deepak Parekh, chairman, HDFC, to question whether Indian companies are by-passing Indian guidelines of prior primary listing by setting up subsidiaries abroad, raising money at AIM and routing the money back to invest in India while addressing a seminar on ?London Listing-Special emphasis on AIM?. But critics argue that these guidelines are meant only for ADR and GDR listing.
The major driving factor behind this rush towards AIM, according to a market expert who did not wish to be named, is the inherent tax advantage involved in it. These companies enjoy tax benefits in India by routing their money back into the country through the Mauritius route. They are neither required to pay tax in Britain as they are domiciled elsewhere in some of the major tax havens. Now it will be up to regulators and policy-makers to ponder over these issues as India has a dubious history of money-laundering despite stricter rules and regulation available under Foreign Exchange Management Act (FEMA).
In mid-2006, with the intention of restricting the flight of domestic capital from India, Sebi introduced the Qualified Institutional Placement (QIP) for domestic listed companies to raise further capital, which is proving a success. Since its introduction in May 2006, 30 companies have opted for the QIP route to mobilise capital amounting to Rs 7,300 crore. Now that Indian investors are showing a greater appetite for taking risks and participating in the equity market, market players feel that it is high time that Sebi should seriously think of having an alternative platform for SMEs to raise capital.
Says Jai Mavani, executive director, KPMG: ?The need for an alternative platform for SMEs is certainly long overdue. With the Indian capital market becoming more sophisticated and deep, a subsidiary market like AIM in London should be available for Indian SMEs to raise funds. MoF, Sebi and other regulators should take this strategic initiative?. Only then in the long run market experts feel that we would be able to make Mumbai a global financial hub and protect our capital market.
Once an alternative platform is established, it will restrict the practice of Indian companies bypassing Indian guidelines to sell the India growth story abroad and help domestic investors participate in corporate India?s growth. Overall, there is a broad consensus among market players that restricting companies to approach overseas investors to raise capital would be counter productive in the long run.
With economic liberalisation reaching new heights resulting in closer integration between global markets and financial institutions, only closer cooperation and information sharing among regulators of various nations could stem a possible financial fraud and protect the financial integrity of the nation.