Equity Financing Alternatives
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GDR Process Overview
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GDR Considerations
A GDR is a positive step towards accessing blue-chip investors who are holders of L&T
and its comparables in Europe and Asia
GDR Process Overview
Pros and Cons of Listing in London Stock Exchange vs. Luxembourg Stock Exchange
GDR
London Stock
Exchange
Luxembourg
Stock Exchange
Pros: Only London has a dedicated GDR trading
platform, the International Order Book
(“IOB”)
– Order-driven, fully electronic, real-time
trading reports
Historically faster process than London Stock
Exchange
Enhance liquidity by making GDRs available
for trading in London on the IOB
No IFRS requirement (1)
L&T is Currently listed on Luxembourg
Cons: IFRS requirement (1) Less liquid than London Stock Exchange
London Stock Exchange Luxembourg Stock Exchange
GDR Listing Alternatives Considerations
A follow-on GDR listing would further allow L&T access to
additional world-class investors
GDRs have been issued by several Indian companies in recent
times due to the faster listing process and less stringent corporate
governance requirements
The London and Luxembourg stock exchanges are the two main
listing venues for Indian GDR issuers
Difficult to maintain significant liquidity in GDR listing due to
“flowback” to home market
___________________________1. IFRS financials will not be required for listing on the Professional Securities Market of the London Stock Exchange or the Euro MTF market of the Luxembourg Stock Exchange.
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Indicative GDR Offering Process Timeline
Week
1 2 3 4 5 6 7 8 9 10 11 12Process
Appointment of bookrunners, lawyers, and accountants
Preparation of Audited Financial Statements
Organization Meeting
Due Diligence
Prepare Draft Preliminary Prospectus
GDR Specific Process
File Offering Circular with Stock Exchange
Offering Circular Review Period
Investor Education (Outside of the US only)
Print & Distribute Preliminary Offering Circular
Roadshow
Pricing, Allocation and Sign Documentation
Closing and Payment
Print Final Offering Circular
___________________________Note: This timetable assumes that the issuer has financial statements for a three-year period that have been audited by a major accounting firm and that there are no accounting issues in the registration statement
raised by UKLA.
GDR offering can be completed in 8 to 10 weeks on LUX and 12 to 14 weeks on LSE
IFRS accounts will further extend the
timeline
London SE approval may take up
to 3 weeks
GDR Process Overview
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ADR Process Overview
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ADR Listing
An ADR listing will provide L&T a strong brand awareness around the worldADR Process Overview
Pros and Cons of Listing in NYSE vs. NASDAQ
ADR
NYSE
Pros:
World’s largest equity market with the broadest reach of investor base
High liquidity
Highest international visibility & profile
Largest research following
Potential valuation benefits
Cons:
Full SEC disclosure and U.S. GAAP reconciliation
- SEC contemplating inclusion of IFRS for foreign issuers
Stringent corporate governance responsibilities
Ongoing reporting responsibility
Highest initial / ongoing costs / fees
NYSE
ADR Listing Alternatives Considerations
ADR listing can help L&T to gain access to broader investor
base than GDR listing, including US focused funds and US retail
investors
All substantial (>300 mm) international offerings by Indian
companies have been through this route, over the last 2 years
Aftermarket trading could be at a premium to local market price
– Adequate float ensures higher liquidity for good aftermarket
ADR takes longer time than GDR given the requirement of full
SEC disclosure and U.S. GAAP reconciliation
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Indicative ADR Offering Process Timeline
Week
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19Process
Appointment of Bookrunners, Lawyers, Printer,
Escrow Agent
Preparation of US GAAP Financial Statements /
Sarbanes Oxley Compliance
Organization Meeting & Due Diligence
Prepare Draft Offering Document
SEC Filing and Approval
Analyst Research
Investor Education
Shareholder Approval
Management Road Shows
Pricing, Allocation and Sign Documentation
Settlement (Delivery, Payment)
Trading Commences
Timeline will depend on preparation of US GAAP
financial statements (1)
ADR Process Overview
___________________________1. SEC contemplating to relax accounting norms to include IFRS for foreign issuers
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___________________________
1. In the absence of such a committee, the issuer’s entire board of directors may act as the audit committee if each member of the board is an independent director.2. A controlled company is defined as a company of which more than 50% of the voting power is held by an individual, group (as defined per Section 13(d)(3) of the Exchange Act) or another company.
Sarbanes – Oxley Compliance
Company executives are required to personally certify reports filed with the SEC
– Certification must be made with regards to material disclosures, fair presentation of financial
statements and other financial information, and the adequacy of internal financial controls
Issuers must establish an Audit Committee (1)
– Each member of the committee must be an be an independent member of the board of directors
of the issuer (e.g., officers of the issuer are not permitted to serve on the committee)
Responsibilities of Audit Committee include:
– Pre-approval of all audit and non-audit services to be performed by independent auditors
– Appointment, compensation and oversight of registered accounting firms
– Establishment of procedures regarding accounting, accounting controls or auditing complaints
Section 16 Forms (Forms 3, 4 and 5) must be filed electronically through the EDGAR system
Required disclosure of all material correcting adjustments identified by the issuer’s independent
auditor in accordance with GAAP and SEC rules
New rules requiring disclosure regarding off-balance sheet arrangements and contractual obligation
Need at least 1 independent director on the audit committee at IPO time
Need a majority of independent directors on the audit committee within 1 year following IPO
Need fully independent nominating and compensation committees and a majority independent
board within one year following IPO
Exception is for controlled companies (2), which only need independent audit committee
Foreign issuers involved in an IPO are entitled to a transitional period to comply with certain
Section 301 standard on audit committee independence
Audit Committee Requirements
CEO / CFO Certifications
Enhanced Disclosure
Independent Directors
ADR Process Overview
Deadline for Foreign Issuers
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Financial Statement Disclosure Requirements
Full annual financial statements
– Audited financial statements must cover each of the latest
three financial years
Full interim financial statements
– If a registration statement becomes effective more than nine
months after the end of the prior audited financial year then
interim six month (or nine month, if available) financials
must be provided
– Interim financials must be in U.S. GAAP and audited
financials are preferred
Selected financial information
– Selected income statement and balance sheet data for the past
five years is required
– Financial data for the two earliest years may be omitted if the
issuer can represent to the SEC that such information cannot
be provided without unreasonable effort
– If interim financial statements are included then the selected
financial information should include the interim period as
well as comparative data from the same period in the prior
year
Quarterly financial information
– Disclosure of selected financial information for the previous
eight quarters is common practice for NYSE IPOs
Disclosure Comfort Letter Constraints
If the transaction closes in Q308 or Q408, the comfort letter
requested from the auditor will likely encompass:
– Assurance that Q208 or Q308 financial information has
been audited
– Inquiring of company officials on any changes to financial
statement elements after financial period cut-off
– Agreeing Q208 or Q308 financial information to the
Company’s accounting records (“tickmark” comfort)
For each of these comfort letter elements, the auditor will
require that the audit fieldwork to be substantially complete
The standard for “substantially complete” may differ among
auditing firms
The auditor’s comfort letter procedures will likely dictate the
closing of the transaction in the quarter of December 2007 or
March 2008
ADR Process Overview
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On-going U.S. Reporting Requirements
SEC reporting requirements for listed foreign issuers
Document Content Filing Requirement
Original Registration
Form F-1 Disclosure requirements include business, legal and
financial matters:
– Financial disclosure requires 3-years of audited
income statements and 2 years of audited balance
sheets. The 2 most recent years must be
reconciled to US GAAP
Form F-1 must be declared effective by the SEC prior to
listing of securities in the US market
Ongoing Requirements
Form 20-F The issuer must file an annual report with the SEC.
This will include:
– financial statements reconciled to US GAAP; and
– a high level of disclosure concerning the issuer
and its officers and major shareholders
Form 20-F must be filed annually, within six months of
fiscal year-end
Form 6-K US market receives all information provided to
shareholders in the country of domicile, as frequently
as such information is filed in the home market. This
includes:
– interim financials; and
– updates on significant corporate developments
As soon as possible after release of any such information
in the home market
ADR Process Overview
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QIP Process Overview
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Qualified institutions Placement (QIP) Guidelines
Recently introduced QIP Guidelines provides an accelerated domestic fund raising
option Equity shares or securities convertible into equity shares with a maximum conversion period of 60 months
Restricted to issuance of primary securities only; no secondary shares can be sold through QIP route
To be listed on the domestic exchanges
Qualified Institutional Investors as defined by the SEBI DIP guidelines
Minimum 10% allotment to domestic mutual funds subject to adequacy of demand
Minimum two allottees for issue sizes < Rs. 250 crores, and minimum of five allottees for issue size > Rs. 250 crores
No single allottee to have more than 50% allotment
No allotment permitted to QIBs having veto rights, and rights under shareholder agreement to appoint nominee
directors pursuant to existing equity position
Total capital raised in one financial year cannot exceed five times the networth of the issuer in the preceding financial
year, net worth being defined as per SEBI DIP guidelines
SEBI floor price similar to FCCB and GDR pricing norms applicable
No pre-issue filing with SEBI required
Placement document to be a private document distributed to select investors
Document should be made available on the website of the relevant stock exchange and the website of the issuer
A copy of the placement document to be filed with SEBI within 30 days of allotment
Investment bank to provide due diligence certificate to stock exchange
Placement of shares with QIBs as defined in DIP guidelines by listed companies, through specific resolution under
section 81(1A) of the Companies Act
Shareholder resolution to specifically state that the issue is under the QIP guidelines
Offering within 12 months of the shareholder resolution; minimum 6 months gap between any 2 offerings under the
same resolution
Securities
Investors
Issue Size
Pricing
Documentation
Other Considerations
QIP Process Overview
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Impact of the QIP
Timelines crunched to approximately 7 weeks
from approximately 14 weeks for a regular
follow on offering
Pricing norms same as GDR placement norms
Cost to issuer will reduce as certain cost
elements like printing, advertisement, PR,
registrar and refund cost will get reduced
substantially as compared to a regular follow on
offering
Float will remain in a single market as
compared to split floats in a GDR offering by a
listing company
For Issuer
Easy availability of blocks given the
requirement of minimum number of 49
investors
No lock in requirements if shares acquired
under QIP are sold through recognized
exchanges
Speed of execution and delivery
No margin money (10% in follow on offerings)
payment is involved
Discretionary allotment beneficial for quality
investors as against proportionate allotment in
domestic follow on offerings
For Investors
QIP Process Overview
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Indicative QIP Process Timeline
Week
1 2 3 4 5 6 7Process
Appointment of bookrunners, lawyers, and accountants
Organization Meeting
Due Diligence
Prepare Draft Preliminary Prospectus
File Offering Circular with Stock Exchange
Investor Education (Outside of the US only)
Print & Distribute Preliminary Offering Circular
Roadshow
Pricing, Allocation and Sign Documentation
Closing and Payment
Print Final Offering Circular
QIP offering can be completed in 6–8 weeks
QIP Process Overview
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Rights Process Overview
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Indicative Rights Issue Process Timeline
The rights issue process would require approximately 22 weeks
The disclosure requirements for a rights issue are essentially the same as that for a public issue
– However the main distinction is that the un-audited financials up to one completed month prior to the issue need to
be disclosed
Rights Issue price has to be fixed on date of issuing notice for record date – for computing ex-right price
Rights Process Overview
Week
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22Process
Notice to stock exchange for board meeting
Board Approval
Preparation of restated financial statements
Due diligence & Drafting of offers document
Filing with SEBI & SE
SEBI Comments
Incorporate SEBI comments
Notice period for record date and fix issue price
Printing of forms and Compiling shareholders details
Rights AD notice period
Issue period
Post Issue / Allotment / Listing
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Rights Issue – Key Disclosures
Restatement of financial statements
In addition, profit or loss must be disclosed before and after considering extraordinary items
Clause 6.10.2 lays down guidelines relating to financial disclosure
– Clause 6.10.2.7.(b) relates to situations where retrospective adjustments in accounts are required for the last 5 years
Relevant financial disclosures, including a report by accountants, are also required if the any part of the proceeds of the issue are to be
applied in
– The purchase of any business
– The purchase of an interest in any business
– The acquisition of shares in a company
Due to the nature of the disclosure requirements, the auditors should be brought on board as soon as possible
Retrospective
Restatements of
Accounts for the last 5
years required for…
Past Audit
Qualifications
Material Amounts Relating to
Adjustments for Previous Years
Changes in Accounting
Policies
Incorrect Accounting Policies Followed in
Previous Years
Rights Process Overview
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Rights Issue – Key Disclosures
Group related information
Nature of activities
Shareholding pattern
Composition of the board of directors
Information regarding adverse factors
including sickness & disassociation
Share price movement during the
preceding six months
Disclosures for changes in capital
structure of group companies
General Disclosures
If any of the group companies has made a
public or rights issue in the preceding
three years, disclosure relating to
– The issue price of the security
– The current market price and
– Particulars of changes in the capital
structure since the date of issue
If an implementation schedule was given
in the original offer document,
– A mandatory statement with the
current cost and progress of
implementation of projects is required
Public / Rights Issue Related
Financial information for the last three
years based on the audited financial
statements including
– Equity capital
– Reserves
(excluding revaluation reserve)
– Sales
– Profit after tax
– Earnings per share
– Net asset value
Financial Disclosures
Clause 6.10.3 of the SEBI DIP guidelines, requires disclosures in relation to
– The promoters
– Companies, firms, ventures, etc. promoted by the promoters, irrespective of whether these are covered under section 370 (1)(B) of the
Companies Act, 1956
In case the Issuer company has more than five listed group companies
– SEBI allows disclosure to be restricted to the five largest listed companies determined on the basis of market capitalization 1 month
prior to the filing the draft prospectus
– However, financial disclosure is mandatory for group companies that are sick, under winding up or have a negative net worth
Rights Process Overview
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FPO Process Overview
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Follow-on Public Offering Process
Book Building process:
Price range allowed (with a cap upto 20% of the floor price) with flexibility to move the band in 20% range
Book open for 3 – 7 working days (3 additional days if the band is revised)
Book building process is entirely transparent – Demand at various price levels displayed on real time basis
Investors apply with their respective bids through appointed brokers
– Investors have option to give three bids
– Investors can revise their bids during the course of the bidding period (books opening to books closing)
Offer price decided by company based on the demand - price matrix
Qualified Institutional
Buyers (QIBs)
Retail Investors Non - Institutional
Definition Qualified Institutional Investors
Individuals applying for Rs 100,000 or less per application
All other investor categories
Allocation – Issue
Size > 25% of post
issue capital
Minimum 50% At least 35% (Subject to demand)
At least 15% (Subject to demand)
Allocation – Issue
Size < 25% of post
issue capital
Minimum 60% At least 35% (Subject to demand)
At least 10% (Subject to demand)
FPO Process Overview
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Indicative FPO Process Timeline
Week
1 2 3 4 5 6 7 8 9 10 11 12 13 14Tasks
Appointment of Bankers Lawyers
Management Presentation Kick-off
Documentation & Due Diligence
Preparation of Accounts (recasting, etc.)
File Draft Prospectus
SEBI Review
Comments received
Investor Education
Final Approval
Print Red Herring
Launch offering, Distribute “red herring”
Finalise price band
Roadshow / Bookbuilding
Issue opens
Conduct bringdown due diligence
Sign under-writing agreement
Pricing
___________________________Note: The offering can be priced in about 12 weeks – settlement and listing would take upto another 2–3 weeks.
FPO Process Overview
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Issue Marketing Process
Target investor universe
– MFs, FIIs and insurance cos
– Indian institutions
– Sector investors
– Value / growth funds
– Retail investors
Investor identification
Investor warm-up
– Identify interested target investors
– Identify concerns and begin
discussions
for valuations
Pre-marketing
Pricing
– Allotment
– Closing
– Investor relations
Short-term
Direct marketing
Research coverage
Equity sales force
Shareholder education
Issue opening
One-on-one meetings of interested
investors with the management
Lunch / group meetings
Roadshows and meetings
Research coverage
Value creation
Communication to investors
Create momentum for conversion
Long-term
Preparation Execution Post-marketing
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NCD + Warrant Overview
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NCD + Warrant: An Introduction
“I propose to enhance the tradability of domestic convertible bonds by putting in place a mechanism that will
enable investors to separate the embedded equity option from the convertible bond and trade it separately,"
Finance Minister P Chidambaram in Budget 2008. (1)
– The NCD + Warrant is a hybrid product that has gained popularity in recent months as a cost-effective source of financing
• Precedent issues include HDFC, Bharat Forge and Gujarat NRE Coke Ltd.
– The broad economic rationale for considering an NCD + warrant structure is similar to that of a convertible bond:
• Lower cash cost of a straight debt security by providing investors an equity warrant
• Equity warrant is typically struck at a premium to current stock price to minimize dilution
• Conversion or exercise of the equity warrant mitigates refinancing risk
– The key differences between a convertible bond and a NCD + warrant structure are:
1. Source: Business Standard
Foreign Currency Convertible Bond NCD + Warrant
Warrant Premium Imbedded Warrant Premium is used to reduce the
ongoing coupon payments required
Warrant Premium is paid to the Issuer upfront
maximizing upfront proceeds received
While the NCD coupon is higher than a convertible
bond, the warrant premium can be amortized over the life
of the NCD to compute the effective yield
Marketability Sold as a stapled non-separable security to foreign
investors
FCCB market conditions are currently challenged for
mid-cap Indian issuers
Debt (NCD) and equity (Warrants) components are
separable, which helps achieve optimal pricing
Debt pricing benefits from strong onshore bid for credit
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Benefits of NCD + Warrant Structure
Key takeaways from recent issuances for NCD + warrant structure
Ability to size NCD + warrant independently
While Bharat Forge decided to match the size of the warrant notional to the NCD size, HDFC had a larger NCD size relative to the warrant
notional
ABC can structure the size of the warrant notional and the NCD amount in line with its objectives
Warrants can be customized based on desired premium / issuance price
Lower strike prices correspond to higher premiums and increase the likelihood that the warrants will be exercised
Higher strike prices would lower the initial premium generated by ABC but lower the likelihood of incremental dilution
ABC can consider issuing warrants with varying strike prices and maturities
Can be executed in conjunction with an equity placement
Recent Bharat Forge transaction was essentially a "combo" transaction, where "cheap" warrants were used to compensate equity investors for
participating in the equity offering at a tight discount (constrained by the SEBI floor price)
Diversify investor base
NCD would need to be marketed to only domestic investors
Warrants may be marketed to domestic and foreign investors
Does not require quarterly mark-to-market provisions based on foreign exchange movements
Provides clarity on debt and equity components, thereby allowing proper treatment of amount raised as debt (by lenders and rating
agencies) and equity dilution (by analysts and equity holders)
1
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5
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The NCD + Warrant is a customizable form of financing raise that can help ABC realize its financing objectives
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Indicative NCD + Warrant QIP Timeline
We believe that an issuance could be completed within 4-6 weeks
Process
Appointment of bookrunners, legal counsels, and NCD rating agency
Kick-off meeting with the company and auditors
Due Diligence and Filing of applications with RBI / FIPB, as required
Prepare and Finalize preliminary Placement Document
Non Deal Roadshow
Receive NCD rating from rating agency (10-15 days)
Receive RBI / FIPB approval
File and Receive approval under clause 24(a) of listing agreement
Execute all agreements; Open and Close the Issue
Allocation and Pricing
Finalize Placement Document
Payment and Allotment
Listing and Trading
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ve London or Luxembourg stock exchange listed offering of equity to institutional investors
– Can be an add-on to existing GDRs
High visibility, especially if listed on the London Stock Exchange main board
IFRS accounts will have to be prepared in case of a London main board listing
US SEC registered offering of equity to retail investors in the US and institutional investors
Highest visibility amongst the international investor community
Will have to prepare US GAAP accounts and be Sarbanes Oxley compliant – ongoing compliance
requirements
Accelerated placement of primary equity with domestic and international investors under the
SEBI DIP guidelines
Fastest time to closing
Low visibility relative to international offerings
Issue of primary equity shares to existing shareholders
Rewards existing investors by exclusively allowing them to subscribe to fresh equity
Lengthy execution timeline of 22 weeks
Issue of primary equity shares to retail shareholders in India and institutional shareholders
Further increase domestic float
Long execution timeline - 14 to 16 weeks
American Depository Receipts (“ADR”)
Global Depository Receipts (“GDR”)
Summary of Alternatives
A range of international and domestic equity raising alternatives are available to L&T
Equity Financing Alternatives
Domestic Offerings
Rights Issue
Qualified Institutional Placement (“QIP”)
Follow on Public Offering (“FPO”)
International Offerings
Alternative Key Considerations
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Evaluation of Options
Regulatory
Process
Liquidity
Equity Financing Alternatives
Least Favorable Most Favorable
International Offerings Domestic Offerings
GDR - London GDR - LUX ADR QIP Rights FPO
NA NA NA
Costs
Investor Base
Trading
Premium
Visibility
Timeline
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Comparison of Alternatives
International Offerings
GDR – London GDR – Luxembourg ADR
Execution Timeline Moderate execution timeline
12 to 14 weeks
Relatively faster execution timeline
8 to 10 weeks
Could be faster as L&T is already listed on LUX
Lengthy execution timeline
20 to 24 weeks
Transaction Cost Moderately expensive process
IFRS audit expenses
Cost efficient Relatively high expenses
SEC / SOX compliance costs
Investor Base International institutions
– US investors under rule 144A
International institutions
– US investors under rule 144A
Largest pool of demand
Access to all US investors (including retail)
Japanese investors through a POWL
Pricing At or around the prevailing market price
SEBI pricing regulations will have to be adhered to
At or around the prevailing market price
SEBI pricing regulations will have to be adhered to
Pricing at or around prevailing market price
– ADRs usually trade at a marginal premium to underlying
SEBI floor price regulations must be met
Regulatory
Requirement
London Stock Exchange approvals required
– 3 to 4 week process
Luxembourg Stock Exchange approvals required
– 2 to 3 week process
SEC approval required
– 6 week process
Liquidity Impact Relatively greater liquidity than Luxembourg
– Eventual flow back to Indian exchanges increases liquidity
Illiquid in the international market
– Eventual flow back to Indian exchanges increases liquidity
Highest aftermarket liquidity and transparency
Continuous market making and trading
Visibility High level of visibility with a large section of international investors
Moderate visibility Highest level of visibility and publicity
Dilution Dilution of existing shareholders Dilution of existing shareholders Dilution of existing shareholders
Equity Financing Alternatives
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Comparison of Alternatives (cont’d)
Domestic Offerings
QIP Rights Issue FPO
Execution Timeline Quick execution timeline
6 to 8 weeks
Longest execution timeline
22 to 24 weeks
Lengthy execution timeline
14 to 16 weeks
Transaction Cost Most cost efficient
Lowest ongoing listing / reporting expenses
Moderately expensive process
Low marketing expenses
Relatively high expenses
Institutional as well as retail marketing costs
Investor Base Domestic institutions
International institutions
– US investors under rule 144A
– Non SEBI registered FIIs may participate through P notes
All existing shareholders of the company
Indian retail investors
Domestic institutions
International institutions
– US investors under rule 144A
Pricing At or around the prevailing market price
SEBI pricing regulations will have to be adhered to
At or around the prevailing price At or around the prevailing price
Regulatory
Requirement
No formal approval required
Offering Circular to be submitted to the local stock exchanges
Offering Circular to be approved by SEBI
Offering Circular to be approved by SEBI
Liquidity Impact Immediate increase in liquidity in the domestic exchanges
Immediate increase in liquidity in the domestic exchanges
Immediate increase in liquidity in the domestic exchanges
Visibility Opportunity to re-position story with institutional investors
No significant change in visibility Opportunity to re-position story with retail and institutional investors
Dilution Dilution of existing shareholders No dilution of existing shareholders
Dilution of existing shareholders
Equity Financing Alternatives
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