Indian companies eyeing foreign investors

The growing popularity of fund raising through public equity today is giving
tough competition to the ever-increasing lending rates. Not just this, with more
and more companies that are achieving greater heights also opting for seeking
equity sharing, the business fraternity has now started looking for newer
avenues in the area of fund raising.

We are working on the lines of issuing ADR. An ADR is one of the ways that a
listed Indian company can issue equity capital in the US markets, and is an
alternative to a follow-up public offering (FPO) in India.

An ADR represents ownership in the shares of a foreign company trading on the
US financial markets. The stock of many non-US companies' trades on US exchanges
through the use of ADRs. This enables US investors to buy shares in foreign
companies without undertaking cross-border transactions. ADRs carry prices in US
dollars, pay dividends in US dollars, and can be traded like the shares of
US-based companies.

Each ADR is issued by a US depositary bank and can represent a fraction of a
share, a single share, or multiple shares of foreign stock. An owner of an ADR
has the right to obtain the foreign stock it represents, but US investors
usually find it more convenient simply to own the ADR. The price of an ADR is
often close to the price of the foreign stock in its home market, adjusted to
the ratio of ADRs to foreign company shares.

Sanjeev Bhavnani CEO and MD, Visesh Infotecnics

Procedure for issuing an ADR

Companies going in for an ADR issuance have to be very conscientious
regarding the procedure and regulations. The procedure for an ADR requires
shareholders approval through an extraordinary general meeting (EGM) or annual
general meeting (AGM), and approval for listing from the Bombay Stock Exchange (BSE)/
National Stock Exchange (NSE) initially.

Thereafter, one needs to appoint a Merchant Banker registered on the US Stock
Exchange, where the ADRs are to be listed-US Legal Counsel, Indian Legal
Counsel, US Depository Participant and Trustee, US Banker, etc.

After a due diligence on the company, an offering circular (OC) is prepared,
which is then sent to the US Stock Exchange for listing the company's ADRs on
it. Upon successful completion of these and other formalities, the company can
open the ADR issue and conclude the fund-raise.

Forms of ADR

There are different types of programs that a company can choose from.

Unsponsored shares are ADRs that trade on the over-the-counter (OTC) market.

Level 1-depositary receipts are the lowest sponsored shares that can be
issued.

Level 2-depositary receipt programs are more complicated for a foreign
company.

Level 3-depositary receipt program is the highest level a foreign company can
have.

Restricted programs: Foreign companies that want their stock to be limited to
being traded by only certain individuals may set-up a restricted program.

Though Visesh decided to raise capital and get listed at the US stock
exchange by opting for ADR instrument for the funds, we are planning to adopt a
very similar method-Global Depositary Receipts (GDR) and FCCB-the methods that
have been quite popular in Indian market and are comparatively less complicated
with regard to documentary requirements.

Currently, we are looking at GDRs and FCCBs to meet our fund-raise
requirements. A GDR is very similar to an ADR, and is a financial instrument
used by private markets to raise capital denominated in either US dollars or
euros. It is a bank certificate issued in more than one country for shares in a
foreign company. These shares are held by a foreign branch of an international
bank and trade as domestic shares, but are offered for sale globally through the
various bank branches.

What is an FCCB?

An FCCB on the other hand is a mix between a debt and equity instrument. It
acts like a bond by making regular coupons and principal payments, but these
bonds also give the bondholder the option to convert the bond into stock.

The investors receive the safety of guaranteed payments on the bond and are
also able to take advantage of any high price appreciation in the company's
stock by converting the debt to equity. Due to the equity side of the bond,
which adds value, the coupon payments on the bond are lower for the company,
thereby reducing its debt-financing costs.

With high promises in its fist, ADRs too have some shortcomings when it comes
to the market rates. The pricing of an ADR is currently in line with the Indian
underlying stock price, and normally is at a slight discount to the same.

In volatile markets, premiums to market pricing are difficult to secure, and
as such, companies may not be too keen on ADR floats currently. Another point to
consider is the cost of as ADR float, as a percentage of the funds being raised,
as legal and financial services in western markets are rather expensive.

Future road map

I believe that Indian markets are continuing to entice and excite the
financial world globally. Our gross domestic product (GDP) growth, increasing
domestic consumption, consumerism and population just cannot be ignored.

Raising capital from overseas market through GDR/ADR/FCCB issues will
continue to happen till cheaper debt is easily available to the Indian
industries. Lending rates in excess of 13 percent will have to give way to a
lower interest regime, for companies to stop looking at equity and equity-linked
issues as a means of raising funds to propel future growth.

(As told to Lata Singh)