CAPITAL MARKETS

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CAPITAL MARKETS

• An Overview of Domestic and Overseas Markets

In House Congress, Mumbai At Grand Hyatt, April
29, 2008
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Presentation Plan
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Avenues of Raising Capital for Indian Companies

• Domestic Stock Exchanges
• Initial Public Offering (IPO)
• Offer for Sale
• Public Issue by Listed Companies including Rights
  Issue
• Qualified Institutions Placement (QIP)
• Preferential Allotment

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Investor Categories(25 minimum public
shareholding)
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Legal Framework for Domestic Offerings

• 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)

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Procedural Aspects

• Eligibility criteria for primary issuance (IPO or
  Offer for Sale)
• Rs. 3 Crores (Net Tangible Assets) in last 3
  years
• Rs. 1 Crore (Net Worth) in last 3 years
• Distributable profits for 3 years in last 5 years
• In case of change of name, 50 revenues from
  activity suggested by new name
• Aggregate of all issues in one financial year not
  to exceed 5 times issuers pre issue net worth

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Procedural Aspects

• 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

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Procedural Aspects

• 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

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Procedural Aspects

• 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

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Introduction of Fast Track

• 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

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Procedural Aspects

• Other Requisites for public offerings

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Preferential Allotment

• 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

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Qualified Institutions Placement

• 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

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Qualified Institutions Placement

• 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

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Issue of Debt Instruments

• 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

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Important SEBI Regulations/Guidelines

• 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

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Proposals by SEBI
21 days gap between closing and listing to be
shortened to 7 days
New exchange for SMEs
QIBs to pay 100 upfront for IPOs
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Raising Capital Overseas

• 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

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Legal Framework for Foreign Offerings

• 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)

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Depository Receipts (DRs)

• 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

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Foreign Currency Convertible Bonds

• 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

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Foreign Currency Exchangeable Bonds (FCEBs)

• 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.

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Foreign Currency Exchangeable Bonds (FCEBs)

• 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.

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Overseas Stock Markets

• 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
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Overseas Stock Markets

• 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, Londons AIM has been very
  successful in attracting overseas companies/funds
• lower entry barriers
• a lighter touch on regulation and compliance
• comparative flexibility

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Overseas Stock Markets

• 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

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Overseas Stock Markets

• 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

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Some factors that affect the Capital Market
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GDP, Inflation Current Account Deficit/Surplus

IMF 7.9
GDP growth in India 2007-08 8.7
CMIE 9.5
GDP growth forecast for India 2008-09
IBs 7.0 to 8.4
CMIE 5.5
Inflation scenario for India 2008-09
Trade Deficit has widened over the past year
RBI comfort level (Feb 08) 5
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Money Supply, Interest Rate, Exchange Rate
Foreign Fund Inflow

Money supply in the economy as on March 03, 2008
Rs. 39,98,887 Crores
Representing a Y on Y increase of 21
Bank Lending Rates (2007-08) 12.75 to 13.25
Interest Rates
Total foreign funds inflow in 2006-07 US 29.1
billion
Exchange Rate Rs./ Year Rs./ 2006-07
45.28 2007-08 Qtr 1
41.25 Qtr 2 40.54 Qtr 3
39.47 Qtr 4 39.83 2008-09
39.95 (Week ending Apr 18)

Repo Rate 7.75 Reverse Repo Rate 6
Total foreign funds inflow is 2007-08 (till Feb
08) US 56.4 billion
RBI purchased US 75.4 billion from currency
market in 2007-08 till Feb 08
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Domestic Capital Market Scenario

• 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!

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Thank You