Sangeeta Lakhi | Sulakshna Sinha
The Indian economy has shown unprecedented growth in the last few decades post liberalisation. A robust capital market supplemented by technological advancement and a strengthened legal framework has played a major role in driving the growth thus far.
With the global economy still in and out of turbulent times, the Indian capital markets never fail to disappoint and often emerge as one of the most stable and sustainable of all emerging markets and are often crowned as a safe investment destination.
Reasons behind healthy IPO performance in 2018
IPOs hold a special place in the Indian capital markets and the year 2018, too, has seen a fair amount of them in contrast with other global markets. So, what is driving the Indian capital markets despite the choppy global scenario marred by the geopolitical volatility?
Well, the promising corporate earnings combined with a rising domestic investor appetite could be the two main factors supporting the current trend. Development of junior platforms such as the NSE Emerge and BSE SME with a corresponding surge in offerings on these IPOs have been a bumper trend in recent times.
Having overcome the effects of two bold moves by the current government, the demonetisation drive of 2016 and implementation of the Goods and Services Tax, one can safely say that the Indian economy is back on track with a better-than-expected corporate earnings and a stable GDP growth.
The policy changes brought about by the market watchdog SEBI have also played a very important role in maintaining the current pace of fundraising activity with factors such as good corporate governance, robust financials and the timing always playing a critical role in the success of any public issue. Let us examine a few measures undertaken by SEBI in the year 2018 to make the market environment IPO friendly.
Significant capital markets amendments in 2018
Firstly, there has been an increased focus on the transparency and corporate governance of the board of a listed company by emphasizing on the role of independent directors. The definition of independent director has been tweaked to enhance their accountability in a scenario where this role has often been called into question in the wake of several scams.
The role of the independent directors will now be evaluated for their performance as well as fulfilment of the independence criteria by the board of a listed entity. Emphasis has also been laid on the separation of the positions of chairperson from that of a managing director or a chief executive officer. This, too, is going to become a reality by the year 2020 for top 500 listed entities to start with.
Further, the year 2019 and 2020 are set to witness the implementation of the cap on maximum number of directorships such as no person must serve as an independent director in more than seven listed entities. Same goes for related party transactions.
With the board now being responsible for review of the approved policy once every three years and a complete ban on a related party from voting on any related party transactions, the regulator is committed to work on aspects of governance that may be misused due to lack of clarity. The disclosure of related party transactions must be published on the website of the listed entity. The regulator has also made secretarial audit mandatory for all listed entities among a host of other reforms, including enhanced roles of the committees.
SEBI provisions initiated in 2018 to further boost local investment
Secondly, while the above measures have been undertaken to uphold investor confidence and preservation of interest of all stakeholders, the regulator is leaving no stone unturned in making simultaneous efforts to ease the process of public issues so that more companies come forward and avail the benefits.
A significant step in this regard is the replacement of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations 2009”) with the new regulations of 2018.
Besides the much needed-aligning of the Companies Act, 2013, SEBI has rationalised the disclosure requirement to a great extent. Key changes, inter alia, include financial information to be provided for a period of three years instead of five, threshold for identifying promoter group increased from 10% to 20%, criteria for identification of group companies, etc.
To boost participation by a wider gamut of investors including domestic investors, the shortfall in promoter contribution can now be met by alternative investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions and insurance companies without being categorized as a promoter.
SEBI has also permitted anchor investors to make a minimum application of Rs.2 crores in case of SME IPOs, a move which is likely to enhance participation by anchor investors in SME IPOs.
While these changes have been brought about keeping in mind the market practices, removing unnecessary complexities and doing away with information that may not be relevant, the regulator has taken care that the integrity of the markets is not compromised by putting a complete ban on willful defaulters and fugitive economic offenders from coming up with an initial public offering. Further, disciplinary actions including past penalties against the promoters in the past five financial years are to be mandatorily disclosed.
In recent issues, the domestic institutional investors have overtaken their foreign counterparts in terms of equity participation and have made a prominent footprint mostly coming in as anchor investors and evidencing higher investor interest. With the foreign institutional investors skeptical of emerging markets, we expect participation of domestic institutional investors to continue.
To further boost foreign investment, SEBI has recently relaxed the eligibility and KYC norms for foreign portfolio investment (FPIs) and allowed the FPIs a period of two years for complying with the relaxed norms.
The government has also relaxed FDI norms by enhancing sectoral limits across various sectors in an effort to boost foreign investment. Sectors such as defense, retail, and airline have all witnessed noteworthy reforms. There are talks of a further increase in sectoral limits in sectors such as insurance.
Initiatives by the government towards ease of doing business, enhanced sectoral caps, simpler mechanism to obtain approval for investment coupled by tax exemptions can help maintain a robust business environment for foreign investors leading to a larger inflow of capital.
Besides paving the way to a stronger legal framework, the regulator is not far behind in terms of technology. SEBI, committed to the cause of improving the trading practices introduced algo-trading, a computer based trading system where investors have an upper hand in executing trades and benefit from their speedy execution.
The technology is increasingly becoming popular with the institutional traders and SEBI has taken efforts to address concerns in relation to their usage. In order to scrutinize on any unethical trading, restrictions have been put in place time and again on their use backed by ensuring compliance of best market practices with the aim of protecting investor interest.
Significant SEBI white papers which could see implementation in 2019
One of the most trailblazing proposals by SEBI comes in the form of incorporating the United Payments Interface (“UPI”) with the Application Supported by Blocked Amount (“ASBA”) mechanism, in order to streamline the process of raising funds via public issue.
This alternative payment option for the retail investors is already set to launch on January 1, 2019 and shall cut down the listing time for an IPO from its current 6 days to 3 days. With the growth of UPI users in India, this proposal will make it easier for the retail investors to make payments using their mobile phones, laptops, tablets, or any other medium having an internet connection and on the go.
UPI payments save the investor as well as the issuer the hassle of waiting for a period of three days as is the case with cheques and allows instant payment from anywhere.
SEBI also, vide its consultation paper dated October 26, 2018, has put up for review, proposals for changes to be brought to the Institutional Trading Platform (“ITP”) framework beginning with its name being changed to ‘Innovators Growth Platform’.
Although the framework was introduced vide amendments made to the ICDR Regulations 2009 on August 14, 2015 to facilitate start-ups in various sectors, it failed to gain much interest and has not seen much traction since, while still being retained in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations 2018”). The paper proposes new eligibility criteria in place of the old one under Regulation 283 (Chapter X) of the ICDR Regulations 2018.
The proposal lays down new eligibility criteria for listing on ITP, inter-alia, 25% of the pre-issue capital should have been held by a Qualified Institutional Buyer (QIB)/other regulated entities and/or Accredited Investors (AIs)) for at least a period of 2 years with a cap of 10% to be held by AIs. It is also proposed to reduce the minimum application size from Rs 10 Lakh to Rs 2 Lakh and to remove the cap on post IPO shareholding which is currently 25% among other regulations.
Efforts made to deepen India’s corporate bond market
SEBI, through several trials and errors has managed to develop and streamline its equity and commodities markets. With the announcement made by the Government of India in the Union Budget 2018-19 stating:
“SEBI will also consider mandating, beginning with large corporates, to meet about one-fourth of their financing needs from the debt market.” it now looks to develop and deepen its corporate bond market putting forth a proposal vide its consultation paper dated July 20, 2018.
The proposal not only looks to develop a liquid and vibrant bond market but also tries to reduce dependence of corporates on banks for finances. Aiming to implement this with effect from April 1, 2019, the proposal says that “large corporates” i.e. any corporate which has a long term borrowing of Rs.100 crores or more, credit rating of “AA and above”, intending to finance itself with long term borrowings and having securities which are listed such as its equities or other convertible securities, non-convertible debt securities or non-convertible redeemable preference shares or all of them, must raise 25% of its borrowings (incremental) for the following year through the bond market.
With this promising initiative, we should see a robust bond market soon.
Outlook for 2019
To sum up the overall scenario, the reform initiatives recently undertaken in the realm of capital markets is likely to see an active market for IPOs even in the year 2019.
With such favourable regulatory environment, there are greater chances of the markets becoming more attractive to both domestic and foreign investors with current investment pattern providing comfort in the long run. SEBI, as a torchbearer of the capital markets, by maintaining higher regulatory standards has demonstrated the depth and maturity of the Indian capital markets and is gradually helping restore investor confidence.
Barring the threat of external factors such as the global cues and the forthcoming general elections, we still have a strong pipeline of drafts filed with the regulator to look forward to in the next calendar year.Sangeeta Lakhi is Partner, Rajani Associates and Sulakshna Sinha, is HOD Domestic Capital Markets.