Tom should know, having been involved in capital market transactions for many years and having led many large IPOs (initial public offerings), including most recently the Thomas Cook/ MyTravel merger, demerger of GUS into Experian and Home Retail Group and other public transactions such as the Carlton/Granada merger forming the new ITV television company and the restructuring of Royal Dutch Shell.

He is responsible for the team of specialists who carry out due diligence and other work on IPOs and other capital market transactions involving compliance with the UK Listing Rules. These include both domestic and cross-border deals in the equity and debt markets. Previous audit clients have included, in the property sector, London & Edinburgh Trust and Berkeley Group, and more recently Pearson and Amersham, so Tom is also familiar with continuing obligations and corporate governance requirements for listed companies.

Excerpts from the interview:

Why are Indian companies finding London attractive for capital?

There are a number of reasons why Indian companies are looking to London to raise capital. Over the last 2-3 years London has attracted an increasing number of international IPOs.

In 2007 alone 102 companies raised €20 billion in London compared with 50 international companies raising €9 billion in New York. The US has become less popular due to the higher costs of raising capital (typically 7 per cent underwriting fee compared with 3 or 4 per cent in London) and the ongoing regulatory burden of the Sarbanes Oxley Act, particularly the costs of internal control compliance.

London is also an easier time zone for communicating with investors if you are an Indian company.

Finally a number of shareholder managers have been attracted by London as a place to own property, educate their children, and in some cases to live. The UK Government has attracted some criticism recently by introducing tax proposals, which could reduce London’s popularity if implemented.

Should Indian companies be paying attention to IFRS?

IFRS (International Financial Reporting Standards) have become an internationally recognised GAAP (generally accepted accounting principles) by the major capital markets such as New York, London and Hong Kong.

The SEC dropped the requirement for reconciliation to US GAAP for IFRS-filers in late 2007 and there is talk of domestic US companies being allowed to file using IFRS. Many other countries such as Canada and South Korea have announced plans to move to IFRS. Indian companies looking at raising capital internationally would, therefore, be well advised to start planning for IFRS.

How does India compare with China in capital markets?

China nearly matched Europe in 2007 raising €76 billion from 240 IPOs. China has a very active retail market; many large deals were oversubscribed. This can make the market more volatile as retail investors are more inclined to react to market sentiment.

China is still a significant source of international IPOs to New York with over half of 50 international IPOs in 2007. This is partly due to the influence of US investment banks in China. In contrast only one large Indian IPO went to New York in 2007.

On the impact of global capital markets in Indian markets.

The fallout from the US markets has impacted all markets, particularly the emerging markets, as global investors reallocate funds to safer havens. The Indian market has also been impacted by the Reliance IPO, which was heavily oversubscribed and subsequently saw heavy price falls on listing.

What have been the significant trends in due diligence?

One feature of a London IPO is a higher level of financial due diligence than is traditional in the US markets.

For example, the investment bank commissions a long-form due diligence report on the company prepared by the reporting accountants. This report also helps with drafting the prospectus.

Other private reports prepared by the reporting accountant include the working capital report that reviews in detail the director’s cash flow projections (which support their statement that the company has enough working capital), and the financial reporting procedures report (which looks at the company’s ability to keep the market informed of its financial position on a timely basis). These reports are prepared for both AIM and main market transactions.

Where do you see increased M&A (merger and acquisition) activity?

Mining and natural resources are active, with bids for Rio Tinto and Xstrata in progress.

The scramble for global resources is leading to hot competition in these sectors. Banking is another sector that could see consolidation following fallout from the credit crunch.

Equity versus debt. How is the choice tilting, these days?

The global credit crunch has made it much more difficult to raise debt either in the capital markets or from banks. This has led to a significant reduction in large private equity deals particularly public to private.

The high yield bond market has dried up as investors are reluctant to invest in high risk instruments. Equity has become more popular at the right price although it is a buyers’ market and investors want to see a less aggressive debt/equity ratio.

Your views on corporate governance, in theory and practice.

Investors are generally cautious regarding corporate governance standards in emerging economies. The key to success is a robust and independent board and timely, accurate reporting with no surprises.

Investors are also concerned with their rights, including pre-emption rights, the right to appoint the board and the right to approve major transactions, which are all features of the London market.

Separation of the role of Chairman and CEO is also controversial with this split being standard practice in the UK, but unusual in the US.

D. MURALI

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