Moneycontrol spoke to corporate India’s top merchant bankers and capital market lawyers to decode the enormous wave of fundraising in the equity capital markets during the lockdown, the key triggers and trends and the road ahead…
“Only when the tide goes out, do you discover who has been swimming naked.”
These words from the Oracle of Omaha and legendary investor Warren Buffet serve as the ideal reality check for investors and corporates today.
They are grappling with the triumvirate of an unstable economic environment, pessimistic growth projections and volatile stock markets. They have traded a global economic crisis in the past but how do they trade a global healthcare crisis? There is no model, no worst-case scenario and the trillion-dollar question on everyone’s lips is – is there a vaccine at the end of this long, dark tunnel?
When uncertainty reigns, cash is king. And on cue, the Indian equity capital markets have witnessed frenetic, back-to-back fundraising by domestic corporates in the ‘COVID -19 quarter’.
Frequently Asked Questions
A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.
There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.
Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.
According to Prime Database, between March 25, 2020 (when the nationwide lockdown began) and June 3, 2020, overall fundraising rose by nearly 40 percent on a year-on-year (YoY) basis from Rs 70,575 crore to Rs 97, 834 crore.
Solely the block deals route grew from Rs 8,946 crore to Rs 37,262 crore, registering a whopping 317 percent rise during the same period. There was a sharp spike of 135 percent in qualified institutional placement (QIP) activity as well while the rights issue mechanism grew by six percent, led by a solo heavyweight candidate – Reliance Industries.
RIL’s Rs 53,124 crore rights issue, the biggest equity issue ever by an Indian corporate and the biggest in the world by a non-financial issuer in the last decade, was a much-needed booster dose for a domestic stock market hit by the outbreak of COVID-19.
And it didn’t end there. The Rs 25,480 crore sale of the GSK stake in HUL followed and it was India’s biggest-ever block deal. Bharti Airtel’s Rs 7,600 crore block deal, Kotak Mahindra Bank’s Rs 7,400 crore QIP and Uday Kotak’s Rs 6,900 crore share sale rounded up the list of major fundraising exercises.
SO WHAT EXPLAINS THE FUNDRAISING FRENZY?
“COVID-19 has been critical in all companies asking themselves a tough question on are they prepared to deal with the implications of a likely economic slowdown, the uncertainty associated with it in terms of depth and time of the slowdown and readiness to deal with it from a position of strength. Hence, the current wave of capital raising,” says Kaustubh Kulkarni, Head of Investment Banking (India) and Co-head of Investment Banking (ASEAN), JP Morgan.
A key principle that has been reiterated during the lockdown period is that forward-thinking companies will raise funds well ahead of time to strengthen their balance sheet. But in a tough environment, capital is more likely to gravitate towards well-governed market leaders in respective sectors.
“This isn't survival planning. This is a trend where strong, good quality firms are becoming aggressive, are taking their leadership roles seriously and raising capital to have a buffer,” feels Sunil Khaitan, India Head, Global Capital Markets, Bank of America.
Unlike a bull market, in a crisis situation, the heavyweight companies consider capital not as a commodity, but as a premium.
“Capital ensures that you stand out and capture growth opportunities better in your sector as the smaller players are constrained for capital,” Khaitan adds.
Some players want to first gauge the impact of the lockdown and then take a final decision, but COVID-19 is not the only trigger for fundraising by Indian corporates. Need to raise confidence capital, acquisition capital across equity, regulatory compliance and debt reduction are other reasons.
For instance, on June 5, 2020, Moneycontrol was the first to report that Tata Power, which is reeling under a debt burden in excess of Rs 40,000 crore, was planning a rights issue. Another example is the SBI offer for sale (OFS) in SBI Life Insurance as part of which the nation’s biggest public lender has divested a minority stake in the insurer to meet minimum public shareholding (MPS) norms.
Merchant bankers believe the recent spate of large transactions in the equity capital markets (ECM) space have improved the sentiment around investing in India and have displayed that Indian companies can compete and attract large investments from emerging market and global equity investors.
TACKLING THE LOCKDOWN: DO INVESTORS HAVE A SECRET SAUCE?
Not surprisingly, institutional as well as retail investors have been largely risk-averse in the current environment. But enthused by attractive pricing levels, the former category has been extremely supportive in recent capital raising exercises. Domestic mutual funds are also looking to rotate their cash out of mid-caps and tilt their portfolios towards the blue-chip stocks. The script is no different with retail investors who have taken advantage of any corrections in large-cap names.
“Institutional investors have been in a risk-off mode and have tried to first look at debt servicing ability as a key metric to evaluate investment opportunities. Currently, every investment opportunity is being put through a ‘stress test’ to evaluate resilience to any further negative impact,” quips Ajay Saraf, Executive Director and Head of Investment Banking at ICICI Securities.
One of the biggest hurdles in the current market is that most corporates are unable to give guidance. Recently, in line with global best practices, market regulator Securities and Exchange Board of India (SEBI) had directed listed companies to disclose any material impact of COVID-19 on their business.
According to V Jayasankar, Senior Executive Director and Head of Equity Capital Markets at Kotak Investment Banking, barring companies in sectors like pharma, consumer and speciality chemicals, which are trading close to their 52-week highs, investors are finding it challenging to model for the impact of COVID-19 in the medium term.
“Investors have gradually begun to focus less on FY21 performance and more on FY22 earnings while making investment decisions,” he adds.
THE ‘RIGHT’ THING TO DO!
After the outbreak of the COVID-19 pandemic, SEBI sweetened the existing regime for rights issues in a bid to extend the list of eligible entities. For starters, the regulator has reduced the eligibility requirement of the average market capitalisation of public shareholding from Rs 250 crore to Rs 100 crore for a fast-track rights issuance. Secondly, it has also reduced the minimum subscription requirement from 90 percent to 75 percent of the issue size.
Rights issues are considered more democratic as companies raise additional capital by offering shares to existing shareholders in proportion to their existing shareholding. The process is speedy as a board nod is sufficient and a shareholder’s meeting isn’t required. While QIPs and preferential issues have pricing restrictions, follow-on public offers (FPOs) have a much higher cost of issuance without protecting dilution.
Hence, the rights issue route has gradually emerged as the weapon of choice, for corporates hungry for more capital during the lockdown.
RIL, M&M Financial Services, Future Consumer, Aditya Birla Fashion and Retail, PVR Cinemas and Lemon Tree Hotels are some of the companies that have publically announced rights issues. Tata Power and Shriram Transport Finance are also eyeing the route
“Globally, a rights issue is the fairest way to raise money. Existing shareholders are able to maintain their own shareholding and not get diluted. Promoters would always be uncomfortable diluting at the present prices and if they did a preferential allotment to themselves that would be unfair to global investors,” says Yash Ashar, Head, Capital Markets at law firm Cyril Amarchand Mangaldas.
Saraf of ICICI Securities concurs. “Without a doubt rights issues have been the dominant choice for capital raising in such uncertain times given the ability to freely price the equity,” he says.
“In addition, the ability to tailor various instruments such as a partly paid-up share or a compulsorily convertible debenture or an issue of non-convertible debentures (NCDs) and warrants allows a staggered fundraising, easing out investor liquidity issues as well as securing financing,” Saraf elaborates.
A debenture is a type of debt instrument unsecured by collateral. Compulsorily convertible debentures are considered to be hybrid instruments i.e. they are treated as debt till the time they are converted into equity. The debentures which can’t be converted into equity or shares are called non-convertible debentures. A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date.
Prashant Gupta, Partner and National Practice Head, Capital Markets, at law firm Shardul Amarchand Mangaldas expects companies in the retail, hospitality, entertainment and financial services segments to opt for the rights issue route.
“Given the depressed share prices and the need for capital to sustain business in the short term, we believe a number of companies in these sectors will likely look at rights issues to shore up their balance sheets. Promoters with access to capital will look at increasing their shareholding at lower prices. We saw this after the 2008 financial crisis as well,” says Gupta.
WILL 2020 BE A WASHOUT YEAR FOR IPOs?
We are mid-way through the year and only one company has managed to make its stock market debut, i.e private equity firm Carlyle-backed SBI Cards and Payment Services, the second-largest credit card issuer in the country, which raised around Rs 6000 crore.
Only seven to eight firms have filed their preliminary listing documents with SEBI so far. Earlier this week, Happiest Minds Technologies became the first company to file a draft red herring prospectus (DRHP) since the beginning of the nationwide lockdown, i.e March 25, 2020.
According to data compiled by Prime Database, from March 25, 2020, to June 3, 2020, IPOs have seen a drop of 100 percent with Rs 3,159 crore raised last year compared to nil during the same period. Most firms have deferred their IPO plans due to deteriorating market conditions which got exacerbated due to a rise in coronavirus cases. In the wake of the coronavirus pandemic, SEBI had extended the validity of regulatory approval for launching initial public offerings by six months and also introduced relaxations on change in fresh issue size.
Usually, a rise in secondary market activity, particularly in block placements and follow-ons, is a precursor for a revival in listings. But markets have been excessively choppy this year.
“It is unclear when the IPO market will revive but it looks unlikely that 2020 will offer any meaningful market windows; so, in the interim, prospective IPO candidates may look at alternative modes of capital raising and shelve IPO plans until stability returns,” feels Anuj Kapoor, MD and Head of Investment Banking at UBS India.
Everstone-backed Burger King India, speciality chemicals maker Rossari Biotech and waste management specialist Anthony Waste Handling Cell are some of the companies whose IPO launches were hit due to market volatility and COVID-19.
Kotak’s Jayasankar predicts that the market may begin to see IPOs getting done towards the end of next quarter. “The first set of IPOs are likely to be of those companies with a strong track record and which are better poised to take advantage of growth as the economy recovers,” he adds.
Typically, the IPO market recovers with a longer lag as the entire process including roadshows takes around 6 to 9 months. On the other hand, block trades can be executed in a couple of days, though larger ones need more planning. Similarly, QIPs and rights issues can be completed within a timeframe of 45 to 60 days.
Kulkarni of JP Morgan says, “ IPO’s will be slow off the block as investors will focus more on existing listed companies and dealing with capital requirements for them.”
But Khaitan of Bank of America is more optimistic. “Secondary issues are being well received. We don’t believe, it's a washout year for IPOs. There are good chances of IPOs coming back in six to eight weeks from now,” he says.
Many of the IPOs in 2018 and 2019 were driven by financial services companies such as insurance firms, microfinance and small finance banks. But due to the impact of COVID-19 on the sector, experts believe the BFSI segment may need to wait until next year to access the IPO market.
According to Gupta of Shardul Amarchand Mangaldas, “We are hopeful that companies related to the consumer internet sector may look at listing even in the near term since those valuations have sustained through the last three months and private equity and venture funds may also be looking for some exits.”
ARE DELISTING OFFERS HERE TO STAY?
Three entities, namely Anil Agarwal’s Vedanta Ltd, Adani Power and Barings PE-backed Hexaware, have taken the plunge and announced plans to delist or go private and permanently remove their shares from the stock exchange. Post-delisting, the shares of the concerned company cannot be traded anymore. Due to an uncertain business environment and sharp fall in valuations, promoters are typically drawn towards delisting in a bid to operate and restructure their companies without the constant scrutiny of public shareholders and regulators.
Delisting can put the promoters in a spot of bother if the minority shareholders demand a huge premium over the prevailing market price. A classic example is the failure of Linde India’s delisting proposal in June 2019. Post the price discovery mechanism, minority shareholders asked for three times the existing market price and nearly four and a half times the floor price, which wasn’t feasible to the promoters.
According to Saraf of ICICI Securities, “The delisting product has always picked up traction in sustained bear markets. In today’s condition, we believe that there would be select delisting offers where the promoter/parent has the ability to put up the capital required to delist the entity. Now might be a good time to re-attempt given the investor expectations might have sobered down.”
But Ashar of Cyril Amarchand Mangaldas points out the hurdles in the domestic delisting regime. “Some will be genuine cases and some may be trying to prop up the share price. Additionally, delisting in India is procedurally difficult because of the 90 percent requirement, no squeeze out provisions and most importantly the pricing mechanism,” he says.
A reverse book-building process determines the final delisting price which requires approval from at least 90 percent of shareholders. Based on recent changes to the delisting norms, an acquirer is allowed to make a counter offer if the price discovered during the reverse book-building is not acceptable.
NEXT WAVE OF FUNDRAISING: TOP SECTORAL PICKS
All the merchant bankers and capital market lawyers Moneycontrol spoke to, shared the following viewpoint – the financial services sector is the first off the block to raise funds amidst any kind of crisis. Banks and NBFCs need confidence capital to meet any credit underwriting costs as well as manage their rating requirements.
Yes Bank, IndusInd Bank and IDFC Capital First are some of the private sector names which have been linked to fundraising during the lockdown period.
“Banks and NBFCs will evaluate the need for, and extent of, capital raising well in advance of the build-up of non-performing assets. An accurate assessment of the level of economic stress will emerge only after the moratorium on payments by borrowers ends on August 31,” said Kapoor of UBS.
Merchant bankers also expect action amongst high-quality consumer and retail companies looking to pivot their business model and infrastructure companies keen to undertake their business activities. Healthcare, real estate and telecom round up their list.
TWEAKS TO FUNDRAISING REGIME: WISHLIST FOR SEBI
Enhanced flexibility over pricing of capital raising tools is the key demand of all merchant bankers and capital market lawyers.
“The right pricing continues to be an issue for a number of investors in capital raising tools like QIPs. For instance, a 5 percent discount may work in a QIP for a big, tier-i firm or a bank. But for a second- or third-tier firm, that (5 percent discount) may not be enough,” points out Khaitan of Bank of America. Hence, he feels that the regulators should consider some relaxations on QIP pricing for entities that have been listed for a long time.
Bankers feel that the regulator should also consider removing the inconsistencies that exist between warrants issued to foreign portfolio investors (FPIs), which need to be converted within 18 months, and those issued to domestic investors, which can be converted over a longer period. Relaxing end-use restrictions and pricing caps for external commercial borrowings (ECBs) could enhance the attractiveness of foreign currency convertible bonds (FCCBs), suggests Kapoor of UBS.
Gupta of Shardul Amarchand Mangaldas has a rather interesting proposal for the IPO regime. “One suggestion would be to allow companies to file DRHPs confidentially with SEBI. Given the uncertainty in the markets, some companies may feel more inclined to file if it is not public at the first instance. Later, depending on how the markets are behaving, it can become a public filing when they are closer to begin marketing for the IPO,” he says. In the US, below a certain revenue cap, companies are allowed to file IPO documents on a confidential basis.
TAPPING THE LIKES OF NASDAQ, NYSE AND TOKYO STOCK EXCHANGE
On May 17, 2020, Finance Minister Nirmala Sitharaman announced that the government would allow direct listing of Indian companies in permissible foreign jurisdictions. This would enable Indian firms to raise capital from around the world, without a simultaneous India listing. The move was cheered by India Inc but requires numerous amendments to the existing Foreign Exchange Management Act (FEMA), SEBI and tax regime.
At present, Indian companies can access the overseas equity markets only through depository receipts (e.g. American Depository Receipts or Global Depository Receipts regime) or by listing their debt securities (such as, foreign currency convertible bonds, masala bonds, etc.) on foreign markets.
According to an EY report dated April 22, 2020, “Overseas listing is expected to increase the competitiveness of Indian companies in terms of access to deeper and diversified pools of capital, lower cost of capital, broader investor base, better valuations and in turn, boost the India brand globally.” The report added that the flexibility provided by the government would also facilitate better benchmarking between peers, promote best practices and cross-border collaboration.
Manan Lahoty, partner at law firm Indus Law expects e-commerce and other internet and technology companies as the usual suspects for overseas listings. “Plus, some mining and bio-technology companies might fetch better valuations in foreign markets and may consider listing,” he says.
In December 2018, a SEBI Expert Committee referred to a list of 10 permissible jurisdictions and specified stock exchanges. These include the US, China, Japan, South Korea, the UK, Hong Kong, France, Germany, Canada and Switzerland.“The choice of listing venue will largely be driven by the nature of business and the niche some exchanges have been able to create. For example, NASDAQ attracts technology companies. On the other hand, LSE has traditionally attracted mining companies,” added Lahoty.