Despite the rise of the QIP, Indian DR issuance continues to thrive, but is underpinned by jumbo follow-on issues for companies that already have ADS programmes in the US. While the QIP grows in acceptability, the limit on investor numbers continues to hamper deal size.
When the qualified institutions placement (QIP) was introduced to Indian equity markets in May 2006, many market participants expected it to spell the demise of the depositary receipt. So far this year, however, a whopping 62% of the US$18.2bn raised by Indian issuers in equity markets has come from offshore.
The sheer volume of equity issuance year-to-date – the largest amount in the past decade – is a sign that Indian capital markets have arrived.
Buoyant offshore issuance this year has been underpinned by a handful of large-scale ADS follow-ons by issuers that already have an established ADS program. These include ICICI Bank’s US$2.15bn ADS and HDFC Bank’s US$700m ADS. Two exceptions are Sterlite Industries’ NYSE listing, which raised close to US$2bn including the shoe and Genpact’s IPO, which raised close to US$500m. These four deals alone accounted for close to half of the US$11.4bn raised offshore year-to-date.
By comparison, GDR issuance remains fairly muted this year as issuance is largely being supplanted by the QIP format. “There has been a slowdown in GDRs. Aside from Indiabulls Real Estate and UTI Bank, we have not seen too many GDRs getting done,” said Ravi Kapoor, head of Indian equity capital markets at Citi. “ADRs are different ballgame because you can get into many liquidity pools such as POWLS (public offers without listing) and there are still premiums for ADRs,” he added.
Like companies elsewhere, Indian issuers generally seek out listing destinations where they are likely to get the highest value for their stock. It was for this reason that in March 2006, Birla Copper became the first Indian issuer to list on the Australian Stock Exchange. The deal, which priced at the top of the range, proved a great success and provided the company with a decent valuation because Australian investors understand mining companies better than investors in many other markets.
Similarly, Indian IT companies have usually been able to get better valuations in the US for their equity, with ADRs issued by tech firms such as WNS and Infosys trading at significant premiums to underlying domestic shares. For many of these IT companies, their customer base is in the US and they choose to list there because it gives them a higher profile among investors.
There are deterrents to Indian issuers aspiring towards a US listing, however. For one, it is far more expensive and there is the presence of the Sarbanes-Oxley. “It’s probably 50% more expensive to do an ADR…you also have a longer process if you have to deal with the SEC. If it’s a GDR, it depends on what market you list it on, but the local regulators aren’t as difficult there,” said Michael Sturrock, a partner in the Singapore office of Latham & Watkins.
ADR deals generally require two sets of legal counsel – which leads to higher costs – and the issuer is faced with strict liability issues as US investors are more litigious. A fast-tracked ADR deal takes about 120–180 days from kick-off to finish, whereas a GDR takes about 60–90 days due to faster clearances from the exchanges, said Sturrock.
GDRs to die a natural death?
The long listing time in the US has led some Indian issuers to head to Luxembourg or London’s AIM, where the process of listing is much faster and the regulatory environment much more relaxed. AIM, for example, has attracted a slew of Indian real estate listings, though it remains to be seen if it is a passing fad.
However, GDR issuance in markets like London and Luxembourg are hampered by issues such as a lack of liquidity and flow back to domestic shares. Since a major motivation of going down the DR route is to get to get a better premium, it makes little sense of Indian issuers to go through the expense and listing requirements of a GDR if trading is then illiquid and they are unable to get a premium.
According to a banker, potential issuers who are looking to issue a combination of equity together with a foreign currency convertible bond (FCCB) may prefer to do a GDR because it only requires filing a single document.
Another reason why Indian issuers might want to do GDRs is if they have shareholders who are close to crossing the 15% threshold limit in a company, whereby shareholders are required to make a general offer to the public. “If they want to put in further equity, a GDR makes sense because it does not trigger any of the local takeover regulation,” said a Mumbai-based banker. “The requirement of making an open offer only gets triggered when you convert the GDRs into local shares,” he added.
Additionally, ownership of GDRs are also rather opaque and once a GDR changes hands, it is difficult for regulators or the company itself to track exactly who is holding the GDRs.
QIPs gain acceptance
Meanwhile, QIP issuance has become a more accepted mode of raising money – given its efficiency, liquidity and the fast approval time, which takes just one or two days. QIP issuance this year has been robust with a slew of deals like IDFC, Max India and Phoenix Mills getting done successfully. Since the QIP format was approved, over 30 companies have raised funds through that route.
“The QIP format scores, barring from the fact that there’s a limit of 49 investors. You are not splitting liquidity in two markets…. Investors like to hold liquid assets and cost wise, its efficient for issuer,” said Citi’s Kapoor.
Without the 49-investor limit, QIP deals would probably be more popular and larger in size. In July this year, Indian infrastructure lender IDFC raised a record US$519m through a QIP. However, IDFC is one of the few companies exempt from the limitation of 49 investors under Indian law, and the deal is unlikely to spark off larger QIPs.
Given the limit on investors, the larger deals are still expected to go through the ADR/GDR route. “The QIPs we’ve been asked to quote on have been in the US$75–US$200m range…It’s probably not as typical to see a big QIP deal,” said Sturrock.
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