IFR India Offshore Financing Roundtable 2014: Part 4

IFR: In terms of analogies, the US passed the Jumpstart Our Business Startup Act (JOBS Act) a couple of years ago and one of the outputs of that was effectively to give private companies public company benefits. So private companies benefited from being able to issue stock publically to investors. However, things like transparency, reporting requirements are very limited. Do you have any concerns about unlisted companies tapping public investors but without the reporting requirements international investors require?

M.S. Sahoo: We don’t believe in a one-size-fits-all approach. As I’ve said, there can be five kinds of BhDRs available in India. There can be also five kinds of American or Global Depositary Receipts. Each kind of DR may meet the needs of a specific group of investors. If the US doesn’t have takers for certain DRs, UK may have. New markets may emerge to take DRs issued on securities of small companies in India. Small companies are not necessarily bad companies.

IFR: That’s true. I wanted to finish up this debt portion, Marco, I’ll give you a chance to comment on that because you have done some Indian bond listings. Is your focus on equity predominantly or is debt on your radar screen as well?

Marco Estermann, SIX Swiss Exchange: It’s bond and equity. For some of the companies we’re talking to, the starting point may be a bond issue, and then the relationship will develop into a potential equity listing or DR listing. We have seen some interesting bond issuance in our market. When I read the Committee report and saw the possibility of issuing DRs on debt, I was surprised because you can issue bonds for any kind of Indian corporate as long as they fulfil the requirements of the investors obviously.

IFR: Are there any questions for our panellists?

Audience Question: On the theme of debt DRs, I’m a part of the debt capital markets ream at RBS, so the same question on debt DRs. Clearly in terms of the market feedback, we know that Indian companies have been raising US dollar and other currency debt for a long time now, and we also know that FIIs have been pumping money into INR bonds predominantly up to one or two years.

But there is a demand for hybrid product where Indian companies raise money offshore; bonds which are listed offshore and traded offshore but denominated in INR. So they are not taking foreign currency risk because some companies are apprehensive about taking foreign currency risk which is typical for a US dollar or CHF bond.

We’re looking forward to the debt DR guidelines in detail but the question to Mr Sahoo, you mentioned about government debt DRs probably preceding corporate bond DRs in terms of the guideline clarity. Is there any apprehension from the government side to allow corporate bond DRs to happen immediately or is it a matter of experience from the government side? I just wanted a little more detail about the thinking from the government.

M.S. Sahoo: I can’t speak on behalf of the government. Essentially, we are not making any distinction from a policy perspective. We are saying: let there be DRs on any instrument. It is for the market to take it or not take it. The DR mechanism started in 1993 but over the last 10 years in particular, there has been very little use of that mechanism. But presence of that mechanism puts pressure on the onshore financial market to remain competitive, which is a desirable outcome.

It’s not necessary for the mechanism to be used. Just making the mechanism available is enough to keep up competitive pressure. As regards rupee-denominated bonds, we are addressing that as a part of our ECB package.

IFR: When can we expect to see your ECB report?

M.S. Sahoo: Not at the speed the financial market moves.

IFR: Let’s move to our conclusion. Bharat, what are you expectations for the Indian equity DR market over the next 12 months? You can answer in terms of how much capital is raised, how many programmes are launched but in any case I assume JP Morgan has some kind of strategy.

Bharat Reddy, JP Morgan: All the banks have strategies; the problem is translating them into reality. At a macro level, large Indian companies – especially in the infrastructure space and in manufacturing – have incurred a crippling amount of debt over the last five to seven years and they’re highly leveraged.

Some Indian companies have been reduced to raising capital via asset sales. This will soon translate into dilution of equity fairly aggressively because from a corporate finance perspective, they need to balance their books a little more appropriately.

Clearly there is going to be significant issuance of paper from Indian corporates in terms of pure vanilla equity, which hasn’t happened over the last two or three years. Valuations are very healthy across the board, especially for the large-cap companies but this rally has not been that broad-based regarding the mid-market companies.

I think over the next six to 12 months you will find that mid-market companies will catch up. How much of this equity raising actually translates into depositary receipts is the 64,000 dollar question. A number of us are in conversations with potential issuers to test the waters to see how they would care to raise money in the overseas markets.

The speed and alacrity with which the government eventually adopts the Sahoo Committee report and the operational guidelines issued by various agencies like SEBI and RBI will be critical in terms of jump-starting that process.

IFR: Neil, let me come to you: you have an Asia Pacific hat on. What do you expect to flow from India and how does India fit in the overall Asia-Pacific picture?

Neil Atkinson, BNY Mellon: Overall the DR market globally is about US$800bn; 75% of those DRs trade OTC, so clearly in India the proportion will increase as we see some Level 1s come through. I think Bharat is right; there’s strategy and there’s reality. The Level 1 market relies upon depositary banks and investors convincing corporates to establish programmes. I think it will take time to get the market up-and-running.

Over the next 18 months, two years, I think we’ll see several companies do that. Potentially we’ll also see banks accessing overseas markets with Basel 3 capital requirements. I’ll touch on the unsponsored market as well. We estimate the unsponsored DR market to be around about US$20bn globally. At the moment, India has zero. Potentially, if that market were to open up, that could lead to a US$2bn investment in India over the next two to three years.

As for Asia Pacific, the China market continues to be pretty robust. We’ve seen 12 issuers from China list in the US markets in the last eight months or so. For China, particularly for tech and a bit beyond that, the pipeline looks pretty robust for 2015, I would say. In South East Asia we’re also seeing interest in cross-border listings as well using DRs.

IFR: Marco, let me come to you. If you get your crystal ball out from your exchange perspective vis-à-vis India, what are you seeing and what would you like to see?

Marco Estermann, SIX Swiss Exchange: What would I like to see? Lots of listings, of course! Looking at the next 12 months, first of all it would be great if the Sahoo Committee Report is implemented. That would obviously help, as would outstanding clarifications on some of the tax issues.

This would help companies and it would help to make sentiment even more positive. I assume that positive sentiment will have an impact on companies going abroad, becoming more international, and using international capital markets to finance their growth. The hope then is for financing or fundraising to take place on our exchange. That’s a hopeful and positive look into the future.

IFR: Mr Sahoo, the final word to you. Were you surprised at how receptive the government was to your recommendations and how quickly they were adopted?

M.S. Sahoo: When I was at SEBI, I used to pass quasi-judicial orders and we had a legal fix on that, which is termed “Functus Officio”. Once you pass the order, you are completely detached from that order; you have nothing to say on the matter. So once we submitted the reports, I had no interest as to what was happening in government. What you came to know, I also came to know. So I was told the government had accepted the ADR report and as regards the IDR report, they put it in the website.

Interestingly, these found a place in the budget from the Honourable Finance Minister, which offers hope. Let me add that both ADRs and BhDRs are super-structures. There are five foundations which have to be synchronised: company law, securities law, foreign currency law, money laundering laws and taxation. And there are five authorities for these five different legs and everybody maintains their respective positions so this ends up in a big negotiation within government to bring all of these legs to the table and reach an agreement.

From what I understand, negotiations are taking place among the five authorities. On the BhDR side, there is one recommendation that has not been picked up by press, which is that SEBI should be the exclusive regulator for the BhDR market. That’s not very widely noticed.

Ultimately, it all depends on how soon they can negotiate and come up with something but hopefully it should happen soon. The history of the securities market has been such that, particularly between 1992 and now, it has been the most reformed sector of the Indian economy. One way to look at it numerically is to see how many times parliament has made laws pertaining to the securities market: in the last 20 years it has intervened about 15 times. That has not happened in any other segment.

The government has been very keen over the last 20 years to reform the securities market. That is why we have such a reformed sector, and I believe the government will also take these two reports with similar seriousness.

IFR: Thank you. Once last chance for questions.

Audience Question: This is for Marco Estermann. What incentives can you offer versus other exchanges?

Marco Estermann, SIX Swiss Exchange: As I mentioned, when you look at an exchange as a gateway to investors, then our locks to open that gateway – that means the listing requirements – are relatively easy compared to other listing locations. Also we guarantee a listing process within four weeks.

That helps the efficiency and the cost-effectiveness of the listing process. Therefore, accessing specific pools of investors in Switzerland such as pension funds, family offices, wealth management, ultra-high net worth individuals; investors looking for higher-yielding returns that are denominated in Swiss francs and large pools of capital that are highly specialised in specific sectors, these are things that are open to companies listing on SIX Swiss Exchange.

IFR: Thank you. On that note, I’ll bring the session to a close. Thank you very much to our speakers, for all of your very insightful comments.

To continue reading this roundtable, click the relevant section. Introduction - Participants - Part 1 - Part 2 - Part 3 - Part 4