IFR Indian Offshore Financing Roundtable: Part 3
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IFR: Recently the Indian Government allowed unlisted companies to list abroad but will there be investor interest in companies which are not domestically listed and for which there is lack of research and visibility?
Samarth Jagnani: It depends upon the sector in which the company is located.
These guidelines are beneficial to companies which have businesses abroad and India is not their primary kind of country in terms of revenue. High end pharmaceutical and life science research and development companies can find natural markets in the US and Switzerland. It will take months for such a company to explain itself to mutual funds in India because they don’t have the domain expertise.
Indian companies just cannot go abroad because they don’t want to list in India. There has to be some rationale. They may also want to list in markets where they don’t have any currency related risk.
Paritosh Basu: You need to have a substantial story to tell if you want to list abroad. Post the general elections, we could see some Indian companies with overseas listing plans. It all depends upon how ready the companies are and how much governance change the managements can do.
Tarun Gupta: I think Bhavna touched upon this issue. A lot of private equity in the unlisted space is looking for exit. Whatever discussions we are having with some private equity players, there is a thought process to look at overseas listing for companies which lack a considerable peer group in India. Medical technology and biotech are examples of such sectors. Visibility to be part of a larger peer group is a great driver for companies.
IFR: What kind of regulatory framework are we expecting for unlisted companies to list abroad?
Abhimanyu Bhattacharya: The ministry of finance notification and the Reserve Bank of India notification have set out the basic framework for unlisted companies. I think we are currently waiting clarification from the government on issues pertaining to pricing of these issues.
Avinash Gupta: Maybe a couple of thoughts for my co-panelist as well. So in terms of the unlisted companies being allowed to list abroad, some things are good and some things are cosmetic. I am not sure how different it is from the past when if you had a smart lawyer and accountant you could put a structure on top of it [unlisted company] and get it listed. The government is making the rules more elaborate in terms of procedure. What my co-panelists are saying is right, what companies need to know now is what the investors want and what are the merits of doing an overseas listing versus an Indian listing.
Bhavna Thakur: We feel hopefully in the coming year some of these companies will start thinking about an India listing and overseas listing. We are having many conversations with issuers including private equity who are questioning if they should look at a domestic issue or an overseas listing.
When the safety net was talked about some of the private equity folks were questioning if they should look at an alternate jurisdiction because they were concerned that it would become a permanent feature in all issues. I think people are going to examine the benefits and burdens of an overseas versus India listing. They are going to look at whether they get a valuation arbitrage, whether it makes sense for them to list from a branding perspective and finally if it makes sense for them from an ongoing perspective. We have also had conversations with a few people who have listed abroad about delisting. We have seen some of the European and Swiss companies have delisted from NYSE because they have not seen the benefit of a dual listing. This begs the question will we see a regulation later which will say that people who are listed abroad have to come back and list in India again as used to be the case before. That regulation itself is something that people have to think about whether they want to split the liquidity.
IFR: Is there any estimate on how many companies will actually list abroad after the new guidelines?
V.Jayasankar: My view is that listing for most sectors is ideal in India because we have seen foreign institutional investors play a far more significant role. There is absolutely no valuation arbitrage and in fact is a reverse valuation arbitrage. In my view, the overseas listing will be limited to sectors such as internet, e-commerce and maybe some of the life science companies. Otherwise, for most other sectors the natural destination is going to be India.
Paritosh Basu: The mineral and meter sectors are emerging and people say that the Ontario Stock Exchange is one of the better places to go. Once the current issues facing the Indian coal sector are resolved, India mineral and metal companies will have to look at outside exchanges.
Pranjal Srivastava: I think it is a pretty good enabler for unlisted companies to look at overseas listings but at a more practical level I think it is going to take a bit of time for things to really pick up. I think there will be more conversations and dialogues with investors and with companies and lot of more hard work for us to prepare presentations.
Bhavna Thakur: Pranjal, is this two year window enough?
Pranjal Srivastava: I think very few actually listings will happen in the two-year window that the government has given for unlisted companies to list abroad. The window will have to be extended if the government is serious about allowing companies to list abroad.
V. Jayasankar: In my view in many sectors you get far superior understanding and valuation appreciation in the Indian market than in the overseas markets. It is not obvious that a certain market only is the right market for a company. Historically, three IT services companies listed in three different markets. For example, Infosys Technologies listed both in India and the US, Cognizant listed only in the US while TCS listed only in India. Cognizant has shown no interest to list in India while TCS has no plan to issue depositary receipts. But if you look on the valuation, there is absolutely no difference in any of them and they can raise as much money as they want in the markets they are listed.
Over a period of time I think you got to do what is right for you as a shareholder and what is right for your clients. This debate on domestic listing versus overseas listing will go on but in my view in more sectors you get far superior understanding, valuation and appreciation in the Indian market.
IFR: The universe of investors in India is shrinking. Can an overseas listing help to get new investors for a company or will it be the same set of investors who are already buying Indian stocks?
Marco Estermann: If a company is looking to go overseas one of the reasons obviously is to tap into a new class of investors that they cannot access via a domestic listing. For instance Switzerland is a one of the largest global wealth management hubs with approximately 30% of the global assets being managed from there. These investors come from very diverse geographical regions and are interested in getting an exposure to global companies but denominated in a stable currency. The second investor class that companies could access is the Swiss pension funds which have some legal limitations to invest outside of Switzerland.
Tarun Gupta: I have some numbers. I think the total value of shares managed out of Switzerland is about $2trn out of which retail investors contribute nearly $500bn. So these retail investors have a significant investment in shares as an investor class.
Samarth Jagnani: If you are listed in India, depending on your market cap you will either get the India Fund of a foreign institutional investor or an Asia Fund to invest in your company. If, suppose the same company is listed in the US, then a global fund can straightaway look at it. The pool of capital which can look at the same transaction is much bigger because everyone will look at it irrespective of size of transaction.
For example when we did the US$80m IPO of Make My Trip we had global funds looking at it from the US and we did not have to rely on India fund managers or India analysts or Emerging Markets fund managers. That is the big difference. Secondly, if an unlisted Indian company gets listed in the US, retail investors can participate and whenever an Indian transaction has happened there is a huge non-resident Indian retail demand for deals. So, there are those pockets which are different to the domestic investor base. You can two times the people looking at India if you are purely listing in the US. There are more people looking at the offer within the same fund complex say a Fidelity or a BlackRock.
IFR: The MS Sahoo Committee has been set up by the Indian government to ease norms for Depositary Receipts and Convertible Bond issuances. What is the market expectation from this committee.
Samarth Jagnani: The recommendation that this committee is going to influence the unlisted companies going abroad to list because ultimately the framework for them is within the Depositary Receipt scheme.
Participants are awaiting the recommendations of this committee because it will both help the Indian companies listing abroad directly and also for some of the companies who want to do a follow-on DR listing or who have DRs listed and want to explore follow-ups.
IFR: How can domestic primary issuance market be improved because an active local issuance market will also create interest in Indian companies which plan to raise funds abroad.
V. Jayasankar: With the Indian economy slowing down we are not seeing such a great need for capital. Wherever the need exists the companies have preferred taking the private equity route. The more capital intensive industries such as power, infrastructure, real estate and banking are the ones that keep coming to the capital market. Of these only the banking sector has been able to raise money last year. The other capital intensive industry are coming to the market to finance working capital needs and I do not think any investor likes to finance equity for working capital.
On the other hand, high growth companies in the consumer industry or in pharmaceuticals are seeing interest from private equity. Everyone is waiting for the elections to be over before raising money. We are not going to see too many listings for at least a year.
Tarun Gupta: In the mid 2000s we saw a lot of outbound investments from India. Are we seeing the trend where Indian companies are looking to now replace the debt taken for those businesses by listing those businesses separately? This is just a question for some of the bankers on the panel.
Avinash Gupta: In many cases the overseas acquisition is very integral to the Indian company’s operations and it may not be that easy to hive them and list them separately. Shareholders and the promoters might not want to do because I think they are far more integrated.
IFR: What are the advantages and disadvantages for Indian companies in each of these listing destinations such as London, New York or Singapore?
Bhavna Thakur: Let me take Singapore market. Regular Indian companies are not going to Singapore to list. It is only the yield based businesses and real estate investment trusts which would like to go to Singapore. The good thing about Singapore is that it is a very good market for REITs. When Singapore investors look at India their biggest concerns are the regulatory and tax environments.
On the business trust front there are many in the works from very interesting sectors such as road, wind energy and alternate energy.
The Singapore market is going to be tested in the next year with these non traditional sectors going there for a business trust listing. However, these are not going to be subscribed by the local Singapore or real estate investors. The pools of capital that will be looking at these business trusts will be the long only investors who invest in India.
What we have seen is that even the business trusts from other countries that are listed in Singapore have not necessarily performed. The tapering will have an impact on the Singapore market and some of the yield investors may also look to the developed markets rather than to continuing to support the Singapore market.
Paritosh Basu: Canada has a better understanding about the minerals sector. Canadian investors are not only having an understanding about the industry around Canada and US they are having an understanding about Asia also.
If you want to go to Johannesburg or Tel Aviv these stock exchanges say that we are not going to list you unless you talk about sustainability management and green reporting.
Bhavna Thakur: One of the things with any metals and minerals company is that international investors have been asked by various activists groups to look at the environmental track record of the companies they invest in. This is very important especially when companies are looking to list in Canada where many of these activist investors look at the environmental issues very carefully.
IFR: To sum up Indian companies are likely to explore the possibility of listing abroad only if they see the need to raise capital . Unless the Indian economy picks up and the currency stabilizes there won’t be a compelling reason for them to list abroad. While Indian stock markets offer higher valuations for Indian companies in some sectors, listing abroad helps to access a larger universe of investors that might have a better understanding of the business models and strategies. Companies in the technology, e-commerce, pharmaceuticals and lifesciences sectors are likely to list overseas as also business trusts in the road and alternate energy sectors.