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How is India Inc. raising funds?
A regulatory framework is a key enabler for innovative financial instruments to cater to options like traditional debt, asset-based and equity financing
An emerging nation like India, with its brisk pace of economic growth and hunger for expansion and development, has a tremendous requirement of capital and the Government’s enterprise and inventiveness in providing safe and innovative financing instruments for India Inc. will go a long way in providing impetus to an already existing economic upswing.
Big companies need access to larger and long-term commitment to capital to boost their growth and a liquid and efficient stock market with a strong regulatory body to promote and regulate the stock markets in addition to protecting investor interests. These go a long way to increase the effective functioning of the financial system and to maintain financial stability. Following Harshad Mehta and Satyam scams, the Securities and Exchange Board of India (SEBI), the regulator for Indian stock markets created in 1992, has consistently tried to lay down market rules in line with the best market practices to provide effective laws and a dynamic capital market. Data from Prime Database showed that Indian companies raised a whopping Rs 1.39 trillion from the primary market in 2017, exceeding the previous high of Rs 1.04 trillion in 2010, reflecting the overall bull run in the secondary market. Also Rs 65,086 crore of the funds raised till date were from 28 initial public offering (IPOs) on the main board of exchanges. Of late, rights issue, through which existing shareholders are given rights to buy additional shares, are also quite popular by Indian companies as they are becoming aggressive in terms of growth and the need to raise money, while not diluting promoter shareholding, is prompting a lot of them to take this route.The hospitality arm of Taj Group, Indian Hotels, has recently issued a 1,500 crore rights issue to reduce its debt levels and also use the proceeds for refurbishing and developing new and existing properties as a part of Rs 3000 crore capex for the next five years. The very fact that there has been a rise in the quantum of capital raised via rights issuance is a clear sign that promoters want to invest in their own companies. It signals a confidence in their company’s growth and the underlying India Inc growth story, which is very positive.
Qualified Institutional Placements (QIPs) seem to be India Inc’s favourite route for fund-raising with the State Bank of India (SBI) joining the bandwagon by raising a colossal Rs 15,000 crore equity capital through this route to support growth and credit requirements till March 2019. Introduced in 2006, QIP was aimed at reducing India’s over-reliance of foreign capital by reducing the complexity associated with raising domestic capital. It introduced a select group of Qualified Institutional Buyers (QIBs), which was a pool of institutional investors such as banks that were deemed to possess the capital and ability to make rational investment decisions and were boosted by robust market sentiments as well as good price recovery. The first eight months of this year saw QIP fundraising reaching Rs 34,881.5 crore already as against the previous record high of Rs 34,675 crore in 2009. Earlier Indigo and Bajaj Finance raised a huge amount of Rs 4,000 crore and Rs 4,500 crore respectively and Kotak Mahindra bank raised an enormous Rs 5,800 crore through India’s second largest QIP. In addition, Yes Bank, Federal Bank, Vijaya Bank, DCB Bank and the United Bank of India have collectively raised QIPs amounting more than Rs 8,000 crore. Piramal Enterprises is also eyeing a QIP of Rs 5,000 crore in the near future. The huge success of QIPs has reduced India’s dependency on overseas equity offerings like American depository receipts (ADRs)/global depository receipts (GDRs) and it is unlikely for overseas equity offerings to regain the popularity they once had. Currently, 179 Indian companies are listed abroad through ADRs/GDRs. The most recent example is that of Hinduja Foundries Ltd, which raised $ 59.94 million via this route in March 2016.
Private equity, venture capital and angel capital are playing a vital role in India’s economic development. According to a report by Grant Thornton, private equity and venture capital investors invested $ 14 billion in 971 deals in 2016 focussing on sectors like telecom, banking and financial services, real estate, IT/ITeS and manufacturing. These sectors contributed around 78 per cent of the overall deal value in 2016. The trend continues in 2017 with private equity firms investing a record $11.3 billion in India in the half year ended June 30, 2017, almost reaching the total investments over the whole previous year, in diverse sectors like healthcare, manufacturing, insurance and business process outsourcing. Further, over the past few years, corporates and multinational companies have been setting up funds to invest in smaller startups, as are also marquee entrepreneurs who are continuing to make investments in their personal capacity. National Capital Region (NCR), Karnataka and Maharashtra received significant PE investment interest with nearly 83 per cent of total investments while the startup sector dominated investment volumes across 15 states with Angel Investors, Sequoia Capital and Accel Partners being the leading PE/VC funds.
Aided by Government regulations and tax breaks, new asset classes like alternative investment funds (AIFs) have grown in the Indian market. Registered AIFs in India have more than doubled over the past two years and stood at approximately 270 in 2016. AIFs have also been a significant contributor to overall fund-raising in the Indian market and contributed to 41 per cent of the total India-focussed funds raised in 2016, compared with only 11 per cent in 2014.
The introduction of Real Estate Investment Trusts (REITs) and InvITs, introduced in India as recently as 2014, help developers securitise their rental yields — lease income — from their commercial properties by issuing shares to financial institutions or retail investors, thereby providing a platform to investors, including small investors, to make a safe and rewarding investment in the Indian property market. India joins a list of 36 countries worldwide that have enacted REIT legislation with 500 listed real estate companies included in the FTSE/EPRA/Nareit Global Real Estate Index, with total market capitalisation of more than $ 900 billion. Close to 283 million sq ft of office space in India is REITable. Currently, there are 901 REIT-worthy properties in India. Modelled on the concept of mutual funds, REITs will provide access to highly lucrative assets, such as large-scale commercial properties and high-quality retail assets, that may be otherwise out of reach for individual investors. Once the first REIT listings go live in India, an increased institutional and retail investor participation can be seen in this market, which will make REITs one of the important tools for raising funds for infrastructure companies.
The regulatory framework is a key enabler for the development of innovative financial instruments to cater to a wide range of options like traditional debt, asset-based and equity financing. Thus, designing and implementing effective regulation, which balances financial stability, investors’ protection and the opening of new financing channels for SMEs, represent a crucial challenge for policy makers and regulatory authorities. This is especially true in case of India, given its rapid evolution and addressing information asymmetries, increasing transparency in the markets, incentivising capital market participants to take a longer-term approach, and creating the right ecosystem. This will go a long way in the development of capital raising tools for India Inc.
(The writer is Assistant Professor, Amity University)
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