We expect more activity on delisting front: CAM capital markets head4 min read . Updated: 27 May 2020, 11:13 AM IST
- Interest in rights issues is expected to grow since this is globally the fairest form of capital raising. This is anti-dilutive for shareholders and existing shareholders get an opportunity to participate in the growth of the company
MUMBAI: Yash Ashar, partner and head – capital markets at law firm Cyril Amarchand Mangaldas, in an interaction with Mint, spoke about trends that are driving capital raising in volatile equity capital markets, growing interest in delisting companies, steps the regulators can explore to further aid fundraising efforts of companies and on overseas listing of Indian companies. Edited excerpts:
By when shall we see the markets open up in a meaningful way for equity capital markets products such as QIP and IPOs?
While the capital raising activity was subdued in the first month of the lockdown, we have started receiving an increasing number of enquiries for capital raising which are mostly in the nature of rights issues, QIPs and preferential issues. Some of our clients have started working on rights issues and QIPs and we expect substantial activity in the coming months. These are companies who have strong businesses and who expect stronger balance sheets to help them in the next 12-18 months, even though they may not immediately need the capital. Some of these issuers may have strong businesses but where the recent events have put short to medium term plans in stress and hence the need to raise capital. Given current market conditions, we expect IPOs to restart and filing of offer documents only in the third and fourth quarter of this financial year. However, we expect companies which are required to list due to regulatory or specific contractual requirements to continue work on IPOs and file offer documents.
Are companies preferring to opt for other fundraising routes like rights issues and preferential placements or even FPOs (follow-on public offer) in this market?
We expect interest in rights issues to grow since this is globally the fairest form of capital raising as this is anti-dilutive for shareholders and existing shareholders get an opportunity to participate in the growth of the company. They can participate at reduced prices. Companies would also prefer this route due to free pricing and recent reforms in rights issue framework which has considerably reduced timelines for undertaking rights issues. Further, Sebi, has introduced and proposed several amendments which would be very helpful for companies to raise capital through rights issues and preferential issues. The interest in FPOs is still limited due to an extensive public issue regime and availability of alternate faster routes.
There seems to be a growing chatter about delisting. What's driving some companies to explore delisting?
Yes, we are also seeing growing interest in delisting. While it is surely a play of depressed valuation and reduced market capitalization, it could also be a strategic move to reward shareholders and have better control over the company. Recent amendments to the delisting regulations such as allowing acquirer/promoter to make a counter offer if the price discovered under the reverse book building process is not acceptable to them and clarification as to the reference date for computing the floor price have also helped in easing the delisting process. While certain issues such as requirement of 90% shareholding of the promoter and promoter group post delisting, which is higher than global requirements, and clarity on counter offer mechanism remain, we expect that there will be more activity on the delisting front in coming months till the companies see significant recovery in the market capitalisation.
In the last two months, Sebi has offered many relaxations to help companies raise funds. What more can the regulator do? There was a demand for relaxation on QIP pricing which seems to have been shot down. Do you think such measures would make life easier for companies?
We hear from market sources that Sebi is already in the process of providing further relaxations and is actively seeking suggestions from stakeholders. Given that QIP is a preferential issue to sophisticated investors, market-linked pricing is fundamental to such issuance and limited discount to such market linked price is a cornerstone to this principle. Whilst provision of additional discount would improve options for issuers, we think a 5% discount is reasonable, as there is always an option of undertaking a rights issue which offers free pricing or FPO which offers a book built pricing. Like in previous downturns, there is demand from international investors to have a product, either dollar-based or rupee-based, with downside protection of some sort and of longer duration. Arguably, from a ‘nationalist’ perspective this is not a good instrument as we could lose out considerably in dollar terms if the company does not perform. And while this may not be within Sebi’s control, RBI and the Ministry of Economic Affairs can permit an instrument with the correct risk structure to allow more dollars to come into the country. This will certainly help listed companies.
The government spoke about allowing direct foreign listings in its reforms package. Do you see this route taking off?
Listing of securities of Indian companies overseas has been on the agenda of this government for quite some time. The government has already addressed some issues such as money laundering and there are certain other issues like capital account convertibility and detailed framework which is still being worked out. We think direct listing will immensely benefit Indian companies especially those companies which are involved in sectors like IT, financial technology and e-commerce as foreign investors would be in a better position to understand and appreciate the business and profitability model of these sectors.