Last year saw a record Indian draw at the Alternative Investment Market (AIM), the sub-market of the London Stock Exchange (LSE) that has a more flexible regulatory system. As many as 13 India-related companies raised $2.7 billion (about Rs11,000 crore at today’s rate) in capital on AIM, the highest in the 12 years of its existence. But 2007 has seen a lower exposure and a new cast. In the seven months ended July 2007, seven companies have listed on AIM, raising a total of $725 million, roughly a fourth of the amount raised in the previous year.
The slowdown is not unexpected. AIM is dominated by real estate companies. And, this year, the sector has seen a global downturn. At least eight Indian realty firms that were planning to list on AIM have shelved plans for the time being, according to industry experts familiar with the development.
Sandeep Bhargava, CEO, Studio18
Also, three of India’s top listed real estate firms have shed between 8% and 36% in market value at the Bombay Stock Exchange since January this year. This has had a dampening effect on India-centric realty stocks on AIM as well.
“Real estate will not be as dominant a sector this year on AIM,” says Ibukun Adebayo, manager, business development, India and International, LSE, who attributes the slowdown to a correction in real estate stock prices globally.
Realty stocks have always enjoyed a disproportionate weightage on the India-centric stock list on AIM, whose regulatory approach suits growing companies which are yet to build a financial track record or trading history. There is no minimum requirement in terms of number of shareholders either.
In 2006, the real estate sector raised $2 billion. Of the seven floats on AIM this year, realty firms such as Dev Property Development Plc. and Naya Bharat Property Co. Plc. were among the firms which together raised $500 million. “In a sense, the trend for Indian companies on AIM is to have listings from the real estate, infrastructure and media and entertainment sectors,” said Adebayo.
This year, more interest has been shown by media and entertainment companies. Two such companies listed in July 2007: The Indian Film Co., a film venture promoted by the media group Network18, raised about $110 million while UTV Motion Pictures Plc. raised about $70 million. In July 2006, Eros International Plc. had raised $50 million on AIM and the scrip is among the better performers on the exchange, quoting at a premium of 200% above listing price, according to Adebayo.
“It is only when you club realty stocks that you see a dip in interest, otherwise the India story on AIM is one of solid growth,” says Pankaj Karna, partner and head, mergers and acquisitions, Grant Thornton, an audit firm that acted as advisers to both the listings by media companies on AIM this year.
Renewable energy, telecom and information technology are the new sectors that are evaluating a listing on AIM, according to Karna, who expects at least seven new issues on the block for the last quarter of this year.
Less is more
Last year, floats on AIM were typically large in size, with Unitech Corporate Parks raising $700 million at the end of December 2006. This year, as the scrip quotes below listing price, companies are beginning to see the benefits of going for bite-sized floats on AIM. “We will see more volume in number of issues on AIM by the end of 2007, but they will be smaller bite-size issues,” says Adebayo.
The average float size is expected to be around $50-60 million for fresh issues on the exchange this year, with a few deals in the $300 million range. Companies preparing to list on AIM pay fees to an adviser nominated by the exchange, termed the nomad, the solicitor and for the preparation of regulatory paperwork. All of this can cost up to $400,000, says an adviser to AIM issues who does not wish to be identified.
In addition, the fees paid to a broker is 4-5% of the size of the float. Many newly-listed companies tend to use issue proceeds to meet these fixed costs, a factor that could influence the price of stock in the initial days of a listing.
But AIM has a far simpler procedure for companies wanting to raise follow-on rounds of financing compared with other mainstream stock exchanges which require the same rigorous procedure as followed in the initial listing. For instance, a company which raised $50 million in 2006 can easily issue a fresh float for a top-up round of financing in the next year.
“Companies know they can come back to AIM for follow-on financing, so they prefer to raise only as much as they need at one go, making for small size issues,” says Adebayo.
For instance, Studio18, a division of Network18, was a new company looking to raise growth capital. To list on an Indian exchange, it would have needed an operational track record of three years, the reason why the company looked overseas to meet its need for quick money. “We were looking to raise only £55 million (about Rs450 crore). That was too small a sum to be raised on Nasdaq or LSE. At the end of the day, when you are raising a small sum, you need to go to a smaller exchange,” says Sandeep Bhargava, CEO, Studio18.
The film venture, titled The Indian Film Co., is now looking to corner at least a 20% market share in the Indian motion picture industry, an opportunity that Bhargava feels would have passed them by if they had waited a couple of years to raise money. “The government allows 100% foreign direct investment in the film industry, and the process of raising capital on AIM is the fastest amongst all exchanges,” says Bhargava, who feels that as the company grows in size, it can graduate from AIM to a larger float on the LSE.
International brand exposure is the other reason why Indian companies are looking towards AIM. For instance, UTV Motion Pictures derives half of its total sales from international business. In the UK, the company has a movie production and distribution business, and recently acquired a gaming company.
“We are looking at various merger and acquisition deals in the UK. So, strategically, it made sense for us to list the company on AIM,” says Siddharth Roy Kapur, executive vice-president, marketing, distribution and syndication, UTV. The scrip was listed at $2.9, and is currently trading at around $3.05, a month after its debut.
Buoyed by the performance of its peers on the exchange, another media company, Compact Disc India Ltd (CDI), is now looking at AIM. “CDI is approaching AIM for a listing as we wish to benefit from a global presence and derive more visibility that will help us become a dominant player in the animation and gaming industry worldwide,” says Gautam Seengal, CEO, CDI.
Despite the euphoria about simpler pre-listing norms, companies are now beginning to realize they need to watch their step once they are on the exchange. For instance, poor investor relations and small trading volumes can significantly impact stock performance. Of the 20 India-related companies now listed on AIM, five are trading at below their listing price.
“While we have a flexible pre-listing procedure, with no minimum capitalization or public float, once a scrip is on the market, the continual obligations that include periodic reporting of performance and transparency of operations are the same as they are on all major exchanges,” explains Adebayo.
The AIM team promoting the exchange is being extra careful about how it proceeds in India, as it wants to dispel the notion that AIM is an avenue to sidestep the country’s regulatory procedure. There are currently at least 15 India-focused nomads looking for deals in the country and the due diligence they expect is the same as required by a New York or London Main Exchange listing.
“The difference is that this financial due diligence report is not submitted to AIM, but is viewed by the nomad,” says Adebayo.
Rahul Bhatia in Mumbai contributed to this story.