In the wake of economic liberalization in India, the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) (the Scheme) was notified by the Government of India in 1993 to allow Indian public companies to tap global investment pools by listings its equity linked (American and global depositary receipts (ADRs/GDRs)) and optionally convertible securities (foreign currency convertible bonds) on overseas exchanges. This scheme enabled various companies in the 90?s to raise funds from the international markets, particularly corporate entities in the internet sector such as Infosys Limited and Rediff.com India Limited. However, after 2000, and with the steady inflow of foreign capital into the Indian capital markets, the government over a period of time altered its stand of progressively liberalizing foreign funds raisings in order to provide a further fillip to the then ever swelling Indian capital markets. Finally, by a 2005 amendment to the Scheme, the Ministry of Finance disallowed unlisted Indian companies from accessing international capital markets unless they were already listed in India or was undertaking to list in India in parallel with its overseas listing. This move was intended to maintain regulatory control on these Indian companies and alongside help develop the domestic capital markets. Upon analysis of the declining performance of the Indian capital markets and the rising economic concerns in the past few years, the Ministry of Finance has been compelled to reconsider its position.
The conventional wisdom is that in order to raise funds from the capital markets, and in particular, from the equity markets, companies are require to demonstrate sustained growth, which will in turn result in an upward trend in its market capitalization. In the recent past, there has been a palpable decline in the amount of funds raised through Indian IPOs. From an aggregate of Rs.46,430.6 Crores raised from IPOs in the year ended March 31, 2011, the amount reduced to Rs.10,978 Crores for the year ended March 31, 2013. Further, market data has shown that out of 37 companies that listed their equity shares in the Indian bourses with price discovery using the ?book building? method in the year 2011, 29 of them are trading below their issue price as on February 14, 2014. The poor performance of the Indian capital markets and decline in value of equity securities can be primarily attributed to overvaluation of stock by Indian promoters while listing, performance of the Indian economy in terms of declining GDP growth rates, inflationary pressures coupled with poor performance of the Rupee in comparison to the United States Dollar, policy level blemishes such as the GAAR legislation and the Vodafone dispute, and the perception of lax corporate governance and rampant corruption in India in the wake of the Satyam crisis and the 2G and other scams. In the face of economic and regulatory disarray, there was a general feeling for the need of alternate and effective capital raising options.
In order to stem the rot, the Ministry of Finance once again amended the Scheme recently by allowing unlisted Indian public companies to access international capital markets, thereby restoring the liberalized stand prevailing during the pre-2005 amendment era. Foreign exchange regulatory requirements such as sectoral policy compliance, use of funds requirements and pricing, that are in any event largely applicable in respect of raising of foreign exchange denominated debt and equity; shall be applicable in respect of such funds raising in the form of issuances of FCCBs and/or ADRs/GDRs. However, one additional requirement has been set out by the Finance Ministry this time that doesn?t form part of the pre- 2005 Scheme — SEBI shall have to regulate and/or specify the disclosure regime in relation to this financial product. While to what extent SEBI actually regulates the process is unclear as SEBI is yet to notify the requirements, this generally results in a disconnect as most of the global stock exchanges where Indian FCCBs and ADRs/GDRs are expected to be listed follow certain specified disclosure standards. For instance, the United States Securities Exchange Commission regulates and specifies the listing standards in respect of ADRs issuances (which are listed in the US exchanges), UKLA does the same for London listings, the Singapore Stock Exchange follows its own standards, and so on. A further set of disclosure requirements by SEBI in respect of such offerings may result in a mismatch between the two sets of guidelines governing disclosure. This may result in confusion as well as contradictions.
Further, as the listing process is still not clear from an Indian stand point, one does not know if at the policy level it is suggested that SEBI approve these offer documents. If that is indeed suggested, then one would have to satisfy two regulators separately in respect of the same offering circular. Such an approach is unprecedented for due reason. Firstly, it may lead to conflicts in presentation in respect of matters where one has to take a judgment call in respect of what and how much is required to be disclosed. Further, changes suggested by the foreign regulator after SEBI has cleared a document may not even be possible as only factual and regulatory updates are generally possible to a SEBI approved document. Secondly, the timelines for listing of ADGs/GDRs in the international markets, whether by way of public offers or private placement, shall get stretched significantly on account of the time required to obtain SEBI?s approval to an offer document. The process for listing in the global exchanges are significantly streamlined, and having to satisfy SEBI prior to distributing an offering circular could lead to delays in fund raisings. In these times of high liquidity constraints and share price volatility, delay to launch an offering can often result in scuttling the fund raising opportunity itself.
In all, the scheme is indeed a welcomed change and an encouraging nudge from the regulators for the under-performing capital markets in India. Listing overseas allows these companies to access a varied pool of global investors not limited to the classic Indian investor pool of institutional investors registered with SEBI as foreign institutional investors. It also enables the corporates to raise funds overseas without having to resort to complex and expensive restructurings such as moving assets to an offshore subsidiary/holding company in order to list overseas. So while this measure will not only limit the current account deficit, but also looks to salvage the current liquidity position in India, particularly with increased investments in depository receipts.
By Kaushik Mukherjee, partner, J. Sagar Associates. Views expressed are personal.
