(Some) foreign firms can tap money in
India By Indrajit Basu
KOLKATA - Four years after the country first
expressed the intention of opening up its capital
markets to foreign companies, and two years after an
Indian finance minister promised that he would do it
"soon", India has finally opened its stock market gates
to global corporations by allowing them to float Indian
Depository Receipts - IDRs - on the Indian market.
Through its Department of Company Affairs (DCA),
India laid out the ground rules for floating IDRs in
Indian stock markets that contain a series of to-dos for
an issuing company. IDRs are securities issued in India
by companies incorporated abroad, to Indian investors,
based on the underlying shares, issued abroad and traded
on any global exchange.
Indian investors,
therefore, will no longer have to approach stock markets
offshore for investing in foreign companies - which,
too, was allowed last month to the extent of US$25,000
each year. They can now invest in shares in major
multinationals, provided, of course, that these giants
take an interest in tapping Indian investors.
"The message is clear," said analysts. "India is
no longer shy of opening up its capital markets."
But even as the chance to invest in foreign
companies while sitting at home has finally come to
Indian investors, who had been hoping for it for a while
now, the rules framed by the DCA "carry with them a
significant amount of baggage of the past and most of
the eligibility criteria listed in it are prohibitive",
said representatives of foreign companies. "The IDR
rules could prove to be a road block and prevent the IDR
regime from taking off in India," said experts from the
foreign institutional investor (FII) consultancy outfit
Nishith Desai Associates.
For instance, one of
the rules of issue states that only those companies
registered overseas that have a net worth - equity
capital and free reserves - of at least $100 million and
average revenue of $500 million during the three
financial years preceding the issue will be eligible.
"The DCA has probably aimed a bit too high by laying
down this rule," says Nishith Desai Associates, because
"it is way beyond the reach of most foreign service
companies who may be remotely interested in raising
funds in India."
According to experts, India is
not an attractive market for product companies because
such companies mostly look at more developed markets for
better valuation. Mostly software and outsourcing
service companies could look at raising funds from
countries such as India, but for such companies the $100
million net worth and the $500 million revenue criteria
may come as far too stiff.
Further, the rules
mandate that the issuing company should have earned
profits for at least five years before the issue and
should have declared at least 10 percent dividends each
year in those years. Again, this clause may pose a
problem for foreign companies, feels Munesh Khanna,
investment banker at N M Rothschild (India) who says:
"It is uncommon, for instance, for many companies in the
United States to declare dividends; all the profits of a
company are typically re-invested into the business of
the company." A very good example is Microsoft, which
would not be eligible to issue IDRs since it hasn't been
a dividend-paying company for the past five years.
The DCA's policing goes even further. The
department, which has categorized these guidelines under
the banner "The Companies (Issue of Indian Depository
Receipts) Rules, 2004", has also mandated that the
repatriation of proceeds of IDRs will be subject to the
country's foreign exchange laws. This means that
specific approval from the Ministry of Finance would
have to be sought for the repatriation of IDR proceeds.
Moreover, IDRs cannot be converted into
underlying equity shares for at least a year from the
date of issue and an IDR issue in a fiscal year cannot
exceed 15 percent of the issuing company's net worth.
The IDRs have to be denominated in Indian rupees as
well, irrespective of the denomination of the underlying
securities.
Any Indian resident, including a
company registered or incorporated in India, and even
FIIs, are eligible to purchase IDRs. Foreigners,
resident or employed in India, subsidiaries of global
corporations and foreign funds registered in India will
also be eligible to invest in IDRs. However, foreign
venture capital investors and venture capital funds are
not allowed to invest, as current regulations governing
them permit them to invest only in initial public
offerings of local companies.
There can be
little doubt, then, that the conditions are restrictive.
Yet there are optimists who feel that the new
opportunity that the country has provided to global
companies will take Indian capital markets a step
forward. "It is a significant step which in the long run
should help building the profile of Indian capital
markets," said Shitin Desai, vice-chairman of DSP
Merrill Lynch. "The move could also lead to India
becoming a regional hub."
Despite the strict
rules, Desai and his ilk feel that IDRs will certainly
open up new avenues for foreign companies who are keen
to acquire or take over Indian companies. Additionally,
this will facilitate stock-swap transactions where
Indian company founders have to be offered stock in
foreign companies in excess of the current investment
limit (of $25,000 per year) that India allows to its
citizens to invest in foreign companies.
The IDR
route also appears attractive for mid-cap foreign
companies, which are familiar with Indian markets or
which have founders of Indian origin. Typically, such
companies are found to be based in the US and Southeast
Asia. And, for Indian-owned companies in the US that
want to be listed in that country and other markets, but
find the cost of compliance stiff, "listing in India may
be an attractive option".
"India is a preferred
destination for raising money cheap because the costs
associated with it are much lesser here than most stock
and money markets globally," said a source from the
US-based Indus Valley Entrepreneurs, an association of
Indian software entrepreneurs.
Nevertheless,
according to consultants Nishith Desai, the rules appear
to be out of sync with the dynamics of international
markets, and "unless they are revised and tuned in with
international practices, it will fail to attract foreign
companies to Indian markets, and IDRs may just remain
just a mirage."
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