indian capital markets – equity fund raising options capital... · 2011-04-19 · indian capital...
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Indian Capital Markets – Equity Fund Raising Options
Keyur ShahMBA (Finance), ACS, LLM
Practicing Company Secretary
Indian Capital Market - Background
• Liberalisation in 1992 by Dr. Manmohan Singh, the then Finance Minister
• Radical changes in law – from strict government to open economy
• Establishment of SEBI – strong legal framework
• Increased Foreign Direct Investment
• Corporate Governance and Reporting Requirements
General Understanding
• Sensex / Nifty: How determined
• Interest Rates: High/Low?
• Liquidity in the system
• Inflation
• Exchange rates: INR Vs. USD
• FEMA Guidelines: Foreign Investments in India (Sectoral
Caps): Automatic Route and Approval Route
• Investments by Indian Company abroad: Automatic
Route: up to 400% of net worth
Legal environment for companies seeking issuance of equity
Issuer
• Policy Decisions of Central Government
• Reserve Bank of India Guidelines
• Overseas Regulations
• Companies Act, 1956
Securities Contract
(Regulation) Act, 1956
Foreign Exchange
Management Act, 1999
Stock Exchanges
SEBI Guidelines for
ICDR
Issuer
Pricing Strategy
–Quality of demand (Retail, HNI, Institutions)
–Price sensitivity
–Account by account feedback
–Current market conditions
–Views of leading investors
–Price relative to comparable companies
– Likely aftermarket activity
Pricing
• Valuation based on Average EPS of Company –PE Multiple
• Compared with companies in similar sector with similar turnover
• Discounted Cash Flow Method
• Book Value Method
Size of IPO and Dilution
• Key Parameters:– Maximum issue size: 5 times of net worth
– Minimum Public Shareholding: 25%
– Dilution of 10%: Rule 19(2)(b): Rs. 100 Cr Public Issue, 20 Lacs shares, Book Building
– Minimum/Maximum Dilution: Minimum 25%/10% and Maximum upto the comfort level of promoters (generally below 50%)
– Minimum capital for listing at BSE/NSE: Rs. 10 Cr
– Feasibility of Project
Case Study
• Net Worth : Rs. 20 Cr
• Promoters Holding: 100%
• Turnover: Rs. 70 Cr
• Net Profit: Rs 7 Cr
• PE Multiple: 10
• Maximum size: ?
• Maximum Price: ?
• How Many Shares to be issued: ?
Solution
• Maximum size: Rs. 100 Cr
• Maximum Price: Rs. 100 (Rs. 10 EPS * 10)
• How Many Shares to be issued: 1 Cr
Allocation Considerations
– Tiering of Investors
– Target key accounts that can build core positions and support after market trading
– Focus on investors with long-term investment horizon and track record
– Target selective under-allocation to ensure after market performance
Media Strategy
Issues to be kept in mind
Cost to be incurred using various mediumsLong term corporate strategy and advantages of building brandSetting the league of the company and Investor perceptionCloser to market environment analysis
Advantages of Corporate Advertising
Corporate Ads are important as restrictions that can be carried out for corporate ads are less onerous than issue related advertisements and therefore better brand buildingServes to give advance notice of public offer though no specific mention is madeReinforces the Issuers name in the minds of investors
Television
SMS
Newspaper
Radio
Hoardings
Media Strategy has to be driven by long term corporate strategy.
Other Fund Raising Options - Debt
• Short Term: Working Capital
• Long Term: Term Loans, Project Finance Loans
• External Commercial Borrowings: Cheaper Rates, RBI norms, maximum $500 Million in a year, all in cost ceiling 300 basis points above LIBOR
• Benefits of Trade on Equity
• Lower Cost of Capital
Debt Considerations
• Viable Project
• Promoters Margin: Around 60% to 70%
• Security: Primary and Collateral
• Track Record of Promoters
• Sector concerns
Fund Raising Options: Equity
• Initial Public Offerings (IPO)
• Further Public Offerings (FPO)
• Rights Issue: to existing shareholders
• Preferential Allotment: Pricing guidelines, lock in requirements, Share Warrants (25%, conversion in 18 months)
• QIP: Allotment to institutional investors: Pricing Guidelines, warrants: conversion in 60 months)
Fund Raising Options
• FCCB: Foreign Currency Convertible Bonds
– Issued as debt first
– Option to convert into equity after 3 years or more
– Coupon rate till the time of non conversion
– If not converted, to be repaid with interest
– If converted, listed with the stock exchange in India/abroad
ADR/GDR
• Equity fund raising in foreign markets
• ADR: American Markets
• GDR: European Markets
• Equity shares in bundle are deposited with Indian Custodian Bank which allows issuance of ADR/GDR by foreign custodian banks to investors
• They have option to convert to shares and list in India
Equity Financing Options – Comparison
Criteria IPO
Follow on
Public
Offering Rights Offer GDR FCCB
Qualified
Institutions
Placement
Preferential
Allotment
Pricing • Free –
Issue
determine
d
• Free- Issuer
determined
• Usually Soft
• Free- Issuer
determined
• Usually Soft
• Book
Building
subject to
MoF floor
• Book
Building
subject to
MoF floor
• Same as
GDR
• Relevant
stock
exchange
prescribed
• SEBI
Formula
• Higher of 6
months or 2
week
average of
weekly high
and low
prices
Lock-in for
investors
• None • None • None • None • None • None • 1 Year
Shareholder
approval
• Not
required if
pure equity
instrument
Investors
covenant/
shareholder
agreement/
due
diligence
X X X X X X X
Equity Financing Options – Comparison (Cont’d.)
Criteria IPO
Follow on
Public Offering Rights Offer GDR FCCB
Qualified
Institutions
Placement
Preferential
Allotment
Target
Investors
• QIB defined
by SEBI
which
includes FII
• Non
institutional
• Retail
• QIB defined
by SEBI
which
includes FII
• Non
institutional
• Retail
• Shareholder
s
• Renounces
in all
categories
including
institutions
• FIIs • FIIs, Usually
Hedge and
Speculative
• QIB defined
by SEBI
which
includes FII
• FII, MFs
Completion
period
• 16-18 weeks • 16 – 18
weeks
• 20-22 weeks
to offer
closure
• 8-10 weeks • 8-10 weeks • 6-8 weeks • 10-12 weeks
Accounts • Indian
GAAP
• Indian GAAP • Indian
GAAP
• Indian
GAAP
• Indian
GAAP
• Indian
GAAP
• Indian GAAP
Allocation • Proportionat
e
• Proportionat
e
• Proportionat
e
• Discretionar
y
• Discretionar
y
• Discretionar
y
• Discretionary
Induction of
Quality
investors
• Neutral
• Retail
shareholder
s are
followers
• Neutral
• Retail
shareholder
s are
followers
• Low
• Substantiall
y restricted
to existing
investor
base
• High
• High quality
focused FIIs
participatio
n
• Low
• Attracts
speculative
investors /
hedge funds
• Very High
• High quality
focused QIB
participatio
n
• High
Diversifying
share-
holder base
• High • High • Limited
since caters
to existing
shareholder
base
• Moderate • Moderate • High • Low
Equity Financing Options – Comparison (Cont’d.)
Criteria IPO
Follow on
Public
Offering Rights Offer GDR FCCB
Qualified
Institutions
Placement
Preferential
Allotment
Impact on Liquidity
• Moderate • Moderate • Moderate • High • High • High • Low
Ability to manage dilution
• Negative • Negative • Neutral • Neutral, if managed
• Attractive • Neutral, if managed
• Neutral, if managed
Pricing • Market driven
• At marginal discount to market price
• Soft, Irrelevant
• Market driven
• High premium
• Market driven
• Need to give discount for retail
Flexibility in use of funds
• Moderate • Moderate • Moderate • High • Low • High • High
Disclosure Requirem-ents
• High • High • High • Low • Low • Low • Low
Redemption risk
• NA • NA • NA • NA • High • NA • NA
Restrictive covenants
• Required • Not required
• Not required
• Not required
• Not required
• Not required
• Not required
Debt/ Equity Impact
• Positive • Positive • Positive • Positive • Negative and risky
• Positive • Positive