As the number of domestic Indian IPOs rockets, when will international markets get to share in the spoils.
The Bombay Stock Exchange (BSE) and India’s National Stock Exchange (NSE) have been hives of activity in recent months. While 73 domestic IPOs took place last year, raising some $4.4 bn, the figure looks set to more than double this year. ‘We estimate that 2007 could witness about 150 IPOs, raising nearly $10 bn,’ remarks Prithvi Haldea, managing director of New Delhi-based Prime Database.
The substantial increase in Indian IPOs is being driven by the country’s booming economic growth. ‘Our GDP is growing at more than 9 percent per annum and there is incredible demand, so capacity needs to be created,’ explains Haldea. ‘Many companies want to use their shares for both foreign and domestic acquisitions. They want market valuations, and they also want to get rid of old, expensive debt.’
So booming are India’s domestic markets, in fact, that the government is rumored to be considering lifting its ban on Indian companies listing equity shares overseas. Over the last decade, hundreds of Indian businesses have listed in the US and Europe via global depositary receipts (GDRs). So far, the government appears too wary of losing Indian spoils to international markets to endorse direct listings abroad.
Last year, the Securities and Exchange Board of India (Sebi) introduced qualified institutional placements (QIPs) as a deterrent to Indian companies seeking foreign capital via GDRs. QIPs allow for foreign investments to be made in Indian companies via the private placement of shares. Shantanu Surpure, partner at Mumbai-based law firm Economic Laws, explains that the move was aimed at meeting Indian firms’ growing appetite for capital via domestic securities placements.
While foreign investment appetite has far from waned, however, Mehul Mehta, vice chairman of the IR practice at Adfactors PR, argues that GDR foreign listings are not as popular with Indian companies any more. ‘There is little incentive for Indian groups with largely domestic markets to list overseas, given the regulatory requirements of international markets,’ he explains. ‘The cost benefits just do not pan out.’
New dawn of disclosure
The recent flurry of listings in India has notably driven increased awareness of the need for transparency and investor relations. Indian companies seeking an IPO are now required to file a red herring prospectus with Sebi. Apart from a detailed note on industry background and management discussion and analysis (MD&A), the company in question must also describe various internal and external risk factors, as well as management perception studies. ‘Transparency during an IPO has come a long way in India and now more or less matches international standards,’ Mehta points out.
Last year saw UK-listed oil and gas exploration company Cairn Energy make the unprecedented move of floating its Indian assets on both the BSE and the NSE. Cairn India is currently an autonomous firm managed from India, with an independent board comprising three non-executive directors. Cairn Energy retains a 69 percent stake in the group, while remaining shareholders include a mixture of both international and domestic institutional and retail investors.
The deal took disclosure levels further than has ever been seen before in India, according to an industry source. ‘While India already has very high levels of corporate governance, Cairn India marketed to investors across 19 cities in India, as well as putting on roadshows across Europe, the US, the Middle East and the Far East,’ the insider reveals.
Evolution of IR
Over the last three to four years, Indian companies have increasingly accepted the necessity for investor relations. ‘Previously only a few large companies, mostly in the technology sector, took IR seriously, but now nearly all largecap and many mid-cap companies realize the need for focused IR efforts,’ comments Mehta. ‘As with all emerging markets, global investors are starting to create competition among Indian companies, helping the firms to gain better valuation through increased and improved disclosure.’
Deutsche Börse’s decision to acquire a 5 percent stake in the BSE last February marks a turning point for Asia’s oldest exchange. ‘This is a firm beginning toward bringing the global markets to India,’ states BSE chief executive Rajnikant Patel.
A matter of weeks later, the Singapore Exchange announced that it too had acquired a 5 percent share in the BSE. Like Deutsche Börse, it agreed to cooperate on listings and product development. An insider at the German bourse tells IR magazine the $43 mn deal was more a strategic investment than a financial one: ‘We are keen to expand our activities into Asia as business opportunities are very good there.’
There are some signs the Indian government is relaxing its stance on foreign investments. Vodafone’s recent $18.8 bn acquisition of Hutchison Essar constitutes one of the largest foreign acquisitions ever to take place in India. The deal offers fresh hope that cross-border transactions will become more of a two-way phenomenon, given the spate of large-scale Indian takeovers of foreign companies.
However, even if the Indian government were to consider lifting its ban on direct overseas listings, it would hardly do so if it thought companies would be rushing overseas to raise equities elsewhere. Considering most economic activity in India does not yet occur in the listed domain, there is huge potential for domestic listing activity in years to come.