The demise of overseas equity offerings by Indian companies
Gone are the days when Indian companies raised funds through overseas equity offerings. There are two ways in which a company can garner funds from an overseas capital market. The equity route involves issuing American depository receipts (ADRs)/global depository receipts (GDRs). The second is the debt route in which foreign currency convertible bonds are issued by the company.
“In the 1990s and early 2000s, many Indian companies, especially those belonging to new sectors such as information technology, opted for ADR/GDR route with an objective to get better valuation for the shares of companies and access to global investors. But in the past few years, there has been a steep decline,” said Pranav Haldea, managing director at Prime Database.
In fact in the year ended 31 March, not a single Indian company opted for equity offerings; on the other hand, 29 firms raised Rs60,534 crore by selling bonds overseas, shows data from Prime Database. While the latter is thriving due to interest rate arbitrage making it a cheaper source of funding for firms, the former has significantly dwindled from its peak.
According to some market analysts and tax experts, a slew of factors have contributed to the change in the scenario for fundraising.
First and foremost is the development of the domestic qualified institutional placement (QIP) market, which is a more convenient and cheaper method for both the issuer and investor; also one has been seeing lot of foreign participation there. In fiscal year 2017, 22 companies mobilized Rs13,871 crore, a minor drop from Rs14,358 crore raised in the previous year. The largest QIP of FY17 was from Yes Bank Ltd, which raised Rs4,907 crore, accounting for 35% of the total QIP amount.
The next key factor is the movement in the rupee. “ADR/GDR route was popular at the time when the rupee was weaker and investors were more confident of investing in dollar or pound/euro-denominated instruments. But now the scenario has changed. The rupee has been stable or has strengthened over the past few years,” said Deepak Jasani, head (retail research) at HDFC Securities Ltd.
From the taxation perspective too, it has become an unattractive option.
“As per the guidelines proposed in 2015, conversion of ADRs/GDRs into equity may attract capital gains tax, which was not the case earlier. It should also be noted that in 2011, changes were announced to the Takeover Code which states that an investor may acquire as much as 25% in an Indian company without triggering an open offer; since an investor cannot directly acquire 24.99% in a company, the demand for GDRs, which were used to acquire shares in excess of 15%, has reduced. After the GDR debacle of Pan Asia Advisors Ltd in 2015, authorities became more vigilant and stringent,” said Sangeeta Lakhi, senior partner at law firm Rajani Associates.
“The alleged need for round tripping by some promoters through ADR/GDR issues is also on the wane with the crackdown on black money globally. So, these are some factors which have led to companies refraining from taking the ADR/GDR route lately,” added Jasani of HDFC Securities.
In September 2013, the government allowed unlisted Indian companies to list abroad without having to do an initial public offering in India. However, the move failed to get the desired response due to lack of clarity on the taxation treatment, said tax experts.
Currently, 179 Indian companies are listed abroad through ADRs/GDRs. The most recent example is that of Hinduja Foundries Ltd, which raised $59.94 million via this route in March 2016. The dry spell is likely to continue given the aforementioned factors and it is unlikely for overseas equity offerings to regain the popularity they once had.