Several factors make AIM a favoured market for these companies: lower entry barriers; a lighter touch on regulation and compliance; comparative flexibility; and the perception of greater liquidity than other foreign exchanges previously favoured by Indian companies, such as
But will AIM grab the lion’s share of foreign capital fundraisings for Indian companies?
On closer examination, it is striking that only a handful of Indian or India-focused entities currently on AIM are, in fact, Indian companies (or companies that have been incorporated elsewhere that principally operate, trade and own assets in or from India).
Collectively, they have raised a fraction of the £1.2bn-plus funds raised to date on AIM for
None of this should come as a surprise. The legal and regulatory hurdles that Indian companies must negotiate in order to float on AIM — and the comparatively higher cost of floating on the exchange — mean that Indian companies need very good reasons to turn to AIM.
Changes introduced to Indian securities regulations in 2005 — designed to ensure that domestic investors were able to participate in equity offerings by Indian companies to foreign investors or, in other words, to prevent a flight of capital to foreign markets — require Indian companies contemplating an AIM flotation to list (either before or simultaneously with the AIM flotation) on one of the Indian stock exchanges.
Furthermore, Indian foreign exchange regulations do not generally permit Indian companies to raise foreign capital other than by the issue of global depository receipts (GDRs) or foreign currency convertible bonds (FCCBs). Therefore, assuming that an Indian company is willing to list in
While two Indian companies — Great Eastern Energy Corporation and Noida Toll Bridge Company — followed this cumbersome route to an AIM flotation in 2006 by listing (or undertaking to list) in India while also listing GDRs on AIM and offering them to foreign investors, regulatory restrictions have forced other Indian companies to be innovative in the way they prepare for an AIM flotation. Most have undertaken some form of restructuring, which has resulted in the creation of foreign holding companies that are ultimately floated on AIM and, since they are not subject to Indian regulation, have avoided the obligation to list in
But the time, additional cost and inconvenience associated with such a restructuring may deter unlisted companies from floating on AIM unless there are other compelling reasons to do so.
The regulatory regime needs a review. If its purpose was to prevent a flight of capital the success of AIM in attracting Indian companies over the last 12-18 months demonstrates that this has not been entirely successful. In the meantime, Indian companies are likely to look long and hard at other ways to raise foreign capital before turning to AIM.
Unlisted Indian companies have a number of options. There is a vast amount of private equity funding currently available in
The increasing strength and depth of the domestic capital market allows Indian investment banks to mobilise substantial levels of funding at valuations that for most sectors are likely to be comparable to and possibly more attractive than what can be achieved in foreign capital markets. This is likely to force a number of Indian unlisted companies to reconsider the need for foreign capital — listing on an Indian stock exchange may well be a cheaper and more efficient option for them.
Listed Indian companies are likely to have considerably less flexibility to restructure and avoid the restrictions that the regulatory regime imposes. Traditionally, their ability to access foreign capital has been limited to the issue of GDRs and FCCBs, listed typically on either the
However, listed Indian companies are returning to the traditional GDR/FCCB market. The relative ease and speed with which GDR/FCCB transactions can be structured and implemented — and the comparatively lower transaction costs and commissions — are likely to ensure that this remains a favoured means by which to raise foreign capital. The perceived lack of liquidity in
The introduction by the Indian regulators in 2006 of qualified institutions placements (QIPs) provides listed Indian companies with an additional means of raising capital from domestic and foreign institutional investors without the need to list on a foreign stock exchange. A QIP is a private placing of shares or convertible securities in an Indian company with sophisticated institutional investors. QIPs are less restrictive than public offerings, the process is more streamlined and the cost of raising capital via QIPs should be lower. Therefore QIPs are likely to become an attractive means of raising capital.
Interestingly, although QIPs were introduced with a view to providing Indian companies with more efficient means by which to raise domestic institutional capital (and also with a view to preventing the flight of capital to foreign markets), a number of QIPs over the last six months or so have also attracted foreign institutional investment.
So where does this leave AIM? Indian companies will continue to float on AIM — even if they may not do so as prolifically as they have in the last six months or raise the level of funding that recent AIM issues for Indian companies have done. However, AIM will still appeal to a number of Indian companies for different reasons.
As with Indian real estate funds, the companies may be in sectors where regulatory hurdles would make it difficult, if not impossible, to list on — and raise capital from — domestic markets. They may be in sectors such as oil and gas or mining and metals, where AIM is likely to offer a better valuation or greater fundraising prospects (or both) than the domestic markets. Or they may be fast-growing Indian companies with significant overseas business presence, where an AIM flotation is likely to make sense commercially — notwithstanding the challenges that may appear.
Sunil Kakkad is a corporate partner and head of the