Indian Capital Markets Equity Fund Raising Options

Transcription

1 Indian Capital Markets Equity Fund Raising Options Keyur Shah MBA (Finance), ACS, LLM Practicing Company Secretary

2 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

3 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

4 Legal environment for companies seeking issuance of equity Companies Act, 1956 Overseas Regulations Securities Contract (Regulation) Act, 1956 Foreign Exchange Management Act, 1999 Issuer Issuer SEBI Guidelines for ICDR Stock Exchanges Reserve Bank of India Guidelines Policy Decisions of Central Government

5 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

6 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

7 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

8 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:?

9 Solution Maximum size: Rs. 100 Cr Maximum Price: Rs. 100 (Rs. 10 EPS * 10) How Many Shares to be issued: 1 Cr

10 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

11 Media Strategy Issues to be kept in mind Cost to be incurred using various mediums Long term corporate strategy and advantages of building brand Setting the league of the company and Investor perception Closer to market environment analysis Television SMS Newspaper Radio 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 building Serves to give advance notice of public offer though no specific mention is made Reinforces the Issuers name in the minds of investors Hoardings Media Strategy has to be driven by long term corporate strategy.

12 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

13 Debt Considerations Viable Project Promoters Margin: Around 60% to 70% Security: Primary and Collateral Track Record of Promoters Sector concerns

14 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)

15 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

16 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

17 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

18 Equity Financing Options Comparison (Cont d.) Criteria Target Investors Completion period IPO QIB defined by SEBI which includes FII Non institutional Retail Follow on Public Offering Rights Offer GDR FCCB QIB defined by SEBI which includes FII Non institutional Retail weeks weeks Shareholder s Renounces in all categories including institutions weeks to offer closure FIIs FIIs, Usually Hedge and Speculative Qualified Institutions Placement QIB defined by SEBI which includes FII Preferential Allotment FII, MFs 8-10 weeks 8-10 weeks 6-8 weeks 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 shareholder base High High Limited since caters to existing shareholder base Moderate Moderate High Low

19 Equity Financing Options Comparison (Cont d.) Criteria Impact on Liquidity IPO Follow on Public Offering Rights Offer GDR FCCB Qualified Institutions Placement Moderate Moderate Moderate High High High Low Preferential Allotment Ability to manage dilution Negative Negative Neutral Neutral, if managed Attractive Neutral, if managed Neutral, if managed Pricing Market driven Flexibility in use of funds Disclosure Requirements Redemptio n risk Restrictive covenants At marginal discount to market price Soft, Irrelevant Market driven High premium Market driven Need to give discount for retail Moderate Moderate Moderate High Low High High High High High Low Low Low Low NA NA NA NA High NA NA 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