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An Overview of Domestic and Overseas Markets
In House Congress, MumbaiAt Grand Hyatt, April 29, 2008
Domestic Stock Exchanges Initial Public Offering (“IPO”) Offer for Sale Public Issue by Listed Companies
including Rights Issue Qualified Institutions Placement (“QIP”) Preferential Allotment
Companies Act, 1956
Securities and Exchange Board of India Act, 1992
SEBI (Disclosures and Investor Protection) Guidelines , 2000 (“DIP Guidelines”)
Securities Contracts (Regulation) Act, 1956
Listing Agreements with the Stock Exchanges
The Depositories Act, 1996
Foreign Exchange Management Act, 1999 (“FEMA”)
Eligibility criteria for primary issuance (IPO or Offer for Sale)i. Rs. 3 Crores (Net Tangible Assets) in last 3
yearsii. Rs. 1 Crore (Net Worth) in last 3 yearsiii. Distributable profits for 3 years in last 5 yearsiv. In case of change of name, 50% revenues
from activity suggested by new namev. Aggregate of all issues in one financial year
not to exceed 5 times issuer’s pre issue net worth
Book Building Method 50% net offer to QIBs ;OR ‘Project’ has 15% participation from
financial institutions/scheduled commercial banks of which 10% comes from appraisers
AND 10 Crores minimum post issue face value
capital; OR 2 years of compulsory market making post
issue
Exemptions from eligibility criteria a banking company a corresponding new bank an infrastructure company (conditions
apply)▪ Project must be appraised▪ Not less than 5% of the project cost must be
from appraisers rights issue by a listed company
Pricing Free pricing of shares Issuer company free to fix face value of
the shares offered subject to:▪ If price of share is Rs. 500 or more, then face
value can be less than 10 but must be more than Re. 1
▪ If price of share is less than Rs. 500 then face value of share must be Rs. 10
Fast Track Method(Introduced by SEBI in November 2007)
Listed companies making a public offering Rights Issue
SEBI approval of prospectus not required if: Issuer company is listed for last three years Average market cap is greater than Rs 10,000 Crores 95% of investor grievances redressed (till last
quarter) No SEBI proceedings pending Entire shareholding in dematerialized form
Other Requisites for public offerings
Issue of shares or of convertible securities by a company to a select group of persons under Section 81(IA) of the Companies Act, 1956.
Conditions of preferential issue (Chapter XIII of DIP Guidelines)
▪ Pricing as per the DIP guidelines▪ Continuous listing (Minimum public shareholding)▪ Existing shares of proposed allottee(s) in demat form▪ Lock in of pre-preferential allotment shareholding ▪ No sale and transfer any equity shares for past 6
months▪ Non-transferability of instruments▪ Allotment must be completed within 15 days
Issue of shares or of convertible securities by a company to Qualified Institutional Buyers (“QIBs”) (Chapter XIIIA of DIP Guidelines)
Eligibility:▪ Equity shares listed for one year preceding the date of
notice to shareholders▪ Minimum public shareholding to be maintained
Note:▪ No placement to QIB who is promoter or related to
promoter▪ Pricing as per the DIP guidelines▪ Non applicability of Chapter XIII of DIP guidelines
Conditions: Minimum Number of allottees:
2, where the issue size is less than or equal to Rs. 250 Crores
5, where the issue size is greater than Rs. 250 Crores
No single allottee shall be allotted more than 50% of the issue size.
Transfer restriction for 1 year (except on a stock exchange)
Minimum 10% allotment to mutual funds
Credit rating required Debenture trustee must be appointed Debentures not to be issued for acquisition of shares or
providing loan to any company belonging to the same group. (Not to apply to FCDs converting within 18 months)
Company to create Debenture Redemption Reserve (“DRR”) Debentures to be redeemed as per offer document Offer document to specify the assets on which security is
created and ranking of the charge Premium amount and time of conversion to be determined by
issuer company and disclosed Interest rate on debentures to be freely determined by issuer
company
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (Takeover Code)
SEBI (Prohibition of Insider Trading) Regulations 1992 SEBI (Bankers to an Issue) Regulations, 1994 SEBI (Merchant Bankers) Regulations, 1992 SEBI (Underwriters) Regulations, 1993 SEBI (Registrars to an Issue and Share Transfer
Agents)Regulations, 1993 SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market) Regulations, 2003
New exchange for SMEs
21 days gap between closing and listing to
be shortened to 7 days
QIBs to pay 100% upfront for IPOs
Indian Companies can raise capital overseas by issue of:
Note: Indian companies listing overseas must either before or simultaneously list on the Indian stock exchanges
Companies Act, 1956 SEBI DIP Guidelines Issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism) Scheme 1993 (“FCCB Scheme”)
Issue of Foreign Currency Exchangeable Bonds Scheme,2008
Foreign Exchange Management Act, 1999 (“FEMA”) Foreign Exchange Management (Transfer or Issue
of any Foreign Security) Regulations, 2004 External Commercial Borrowing Policy (“ECB
Policy”) Foreign Direct Investment Policy (“FDI Policy”)
DRs represent shares of an Indian company trading on a foreign stock exchange
The DR holders are part of foreign holding in a company but unlike FDI, investors in DRs do not enjoy voting rights
DRs of most Indian companies experienced a sharp fall due to market meltdown. However, recently the DRs have recovered and trading turnovers have improved.
DRs have become popular because of two-way fungibility
No prior approval of SEBI, RBI or government is required for issue of DRs
No restrictions on the use of proceeds except investment in real estate and the stock markets
Foreign currency convertible bonds are debt instruments which are convertible into equity of the company at a later point of time
Both FDI and ECB policies are applicable Coupon rate must not exceed 300 basis points over
SBI PLR RBI approval required for companies other than
companies who can access ECB under automatic route and for all companies raising more than US$ 500 million
Restriction on use of proceeds US$ 20 million can be raised for rupee expenditure Proceeds to be parked abroad till required in India Preferred by companies for raising funds for
overseas expansions and acquisitions
FCEB Scheme was notified on February 15, 2008
A security offered by an issuing company and subscribed to by investors living outside India and exchangeable into equity shares of another company, which is called the offered company.
The issuing company must be a part of the promoter group and must hold the equity shares being offered at the time of issuing FCEBs. The offered company has to be a listed company, which is engaged in a sector eligible to receive FDI and eligible for ECB.
RBI is still considering the instrument No guidelines for FCEBs issued by RBI yet RBI is unsure how FCEBs would work within
existing framework of ECB Policy Lack of transparency regarding use of the
funds according to RBI Issues on monitoring of the FDI cap on
companies when bonds raised by one company gets converted into equity of another company.
Choice of stock exchange depends upon:
New York Stock Exchange (NYSE)▪ NYSE has 11 Indian companies listed on NYSE.▪ Positive: IFRS accounting norms permitted▪ Negative: SOX compliance is very costly. Only very
large companies therefore list on NYSE
Depth of the Market
Availability of Funds
Regulatory Requirements
NASDAQ▪ Listing is expensive▪ 3 Indian companies listed
London Stock Exchange (LSE) (Main Market)▪ Caters to large companies▪ Has been a favorite with large Indian companies▪ Regulatory requirements are stringent
Alternative Investment Market (AIM)▪ Constituted in 1995, London’s AIM has been very
successful in attracting overseas companies/funds▪ lower entry barriers▪ a lighter touch on regulation and compliance▪ comparative flexibility
Luxembourg Stock Exchange (LuxSE)▪ Traditional favourite▪ Listing is expeditious▪ Cost of raising funds at Luxembourg is lower,
compared to NYSE or NASDAQ▪ Compliance requirements are less stringent
Singapore Stock Exchange (SGX)▪ Listing is less expensive▪ Has large appetite for certain sectors such as shipping▪ Regional hub
Hong Kong Stock Exchange (HKEx)▪ Offers world-class listing platform ▪ Costs of listing and compliance are competitive
Dubai International Financial Exchange (DIFX)▪ Set up in September 2005▪ Fast attracting attention especially of SMEs▪ Expeditious listing ▪ Closer home and good liquidity
Tokyo Stock Exchange (TSE)▪ Japan is keen to promote TSE and Japanese Depository
Receipts (“JDRs”) and attract foreign companies
Asia Pacific Technology Exchange (APTEX)▪ New Australian stock exchange with a focus on
technology▪ Plans to become fully operational by second half of 2008
GDP growth forecast for India:
2008-09
CMIE 9.5%
IBs7.0 to 8.4%
IMF7.9%
GDP growth in India: 2007-08 – 8.7%
Inflation scenario for India: 2008-09
CMIE5.5%
RBI comfo
rt level (Feb ‘08)5%
Trade Deficit has widened over the past
year
Rs. 39,98,887 Crores
Money supply in the economy as on March 03,
2008
Interest Rates
Representing a Y on Y increase of
21%
Bank Lending Rates
(2007-08)12.75% to 13.25%
Repo Rate: 7.75%Reverse Repo Rate: 6%
Exchange Rate Rs./$Year Rs./$2006-07 45.282007-08Qtr 1 41.25Qtr 2 40.54Qtr 3 39.47Qtr 4 39.832008-09 39.95(Week ending Apr 18)
RBI purchased US$ 75.4 billion from currency market in 2007-08 till Feb ‘08
Total foreign funds inflow in 2006-07 : US$
29.1 billion
Total foreign funds inflow is 2007-08 (till Feb ’08) :
US$ 56.4 billion
Although there are negative factors like the gloomy global markets, pressure on the export market due to rupee appreciation, rising inflation rate on one hand, on the other hand India has a strong growth story
Lets hope good times are ahead!