The Hindu Business Line : Fund-raising windows opened a tad wider

The global financial crisis has resulted in a serious aversion to risk the world over, leading to a severe liquidity crunch. In a move calculated to aid fund-starved companies and to alleviate the current market pressures, Indian financial regulators — the Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI) — have announced several measures.

Some of the more significant ones are discussed below.

Rational pricing norms

One of the reasons for Indian companies being unable to raise capital following the global meltdown can be attributed to the pricing guidelines for preferential allotments and qualified institutional placements (QIPs), which in effect provided that the floor price for any preferential allotment or QIP must be computed on the basis of a historical price (that is, the average trading prices for the last six months).

Following the crash of the Indian stock market, this inevitably resulted in a situation where the floor price for a QIP was much higher than the current market price of the securities proposed to be issued, and hence not in sync with market realities.

Indian companies, therefore, found themselves unable to raise capital owing to this anomalous situation, where they were required to issue securities at an escalated historical price in a market severely affected by the bearish sentiment.

To address this anomaly, and to facilitate Indian companies to raise capital in the current bearish market, SEBI has amended the pricing guidelines for QIPs to bring the floor price of the offered securities closer to their prevailing market price, and de-link it from the escalated historical price. The amended floor price formula provides that the issue price should not be not less than the average of the weekly high and low of closing prices of related shares during the two weeks preceding the date of the board meeting in which the board resolves to open the issue.

The amendment introduced for QIPs has also been extended to an issue of shares by way of preferential allotments to qualified institutional buyers (QIBs) provided that the number of QIB allottees in such issue does not exceed five.

Following SEBI’s lead, the Finance Ministry has also introduced a similar amendment to the pricing guidelines applicable to issue of foreign currency convertible bonds (FCCBs), American depository receipts (ADRs) and global depository receipts (GDRs).

As per the new pricing norms introduced by the Finance Ministry, the price (of shares issued upon conversion of FCCBs/GDRs/ADRs) should not be less than the average of the weekly high and low of closing prices of related shares during the two weeks preceding the date of the board meeting in which the board resolves to open the issue.

ECB Guidelines

The narrow window of overseas borrowing by Indian companies has always been sought to be strictly monitored and regulated by the RBI, largely in the interests of the Indian banking community.

However, in the current dismal market conditions, the RBI should be given the credit for taking some progressive steps to boost inflows and help Indian corporates raise funds for projects.

This year has seen an unprecedented liberalisation by the RBI in respect of the ECB guidelines. The all-in-cost ceilings for ECBs are at an all-time high currently with companies permitted to raise ECBs at an all-in-cost of up to 500 basis points over the six month LIBOR for ECBs having a maturity of more than five years.

Another example of the ECB liberalisation can be found in ECBs now being permitted to be used for rupee expenditure. Earlier, borrowers were not permitted to raise ECBs beyond $20 million for rupee expenditure.

However, following the global meltdown, and the reluctance of the Indian banking community to provide finance to Indian corporate at competitive rates, the RBI has been constrained to ease the ECB guidelines to permit borrowers to raise ECB up to $500 million per financial year for both rupee expenditure and/or foreign currency expenditure, for permissible end-uses, under the automatic route.

Previously, the ECB proceeds had to be parked overseas until actual requirement in India and such proceeds could only be invested in specified liquid assets. Bearing in mind the dismal state of the world financial markets and the relative insulation of India from the financial instability plaguing the world markets, Indian companies are now permitted to keep the funds with overseas branches or subsidiaries of Indian banks or remit these funds to India for credit to their rupee accounts with banks in India.

The RBI has also expanded the list of end-uses for ECBs and ECBs are now permitted to be used for mining, exploration and refining.

Perhaps the most significant and welcome change in the ECB guidelines is the liberalisation of security creation in respect of ECBs. Creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of the overseas lender/security trustee, to secure the ECB raised by an Indian borrower is now permitted without regulatory approval subject to fulfilment of certain specified conditions.

FCCB buyback

The RBI has permitted buyback of FCCBs issued by Indian companies under the approval route. This is a move to benefit Indian companies whose FCCBs are trading at a discount in the international financial markets.

The buyback is required to be financed by the company’s foreign currency resources held in India or abroad and/or out of fresh ECBs raised in conformity with the amended law on ECBs. Therefore, it is now possible for companies to raise ECBs with a view to buying back their existing FCCBs (without necessarily adhering to a lower all-in-cost as was required to be done previously).

The above amendments to the ECB guidelines and rationalisation of pricing norms for capital issues come across as positive steps to encourage and ensure flow of funds in tight market conditions, and credit must be given to the regulators to proactively take firm steps to prevent the Indian economy and corporates from being hit by a severe cash crunch.

In the present era of globalisation and inter-dependant world markets, the Indian regulators have taken a step in the right direction by introduction of some quick, rational and forward looking changes.

(The author is Partner, Amarchand Mangaldas.)

Related Stories:
Pricing norms eased for ADR/GDR issues by listed Indian cos
Foreign borrowing norms for cos eased
ECB policy modified to include mining, exploration, refining sectors
External borrowing limit for infrastructure cos hiked

More Stories on : Overseas Borrowings | Regulatory Bodies & Rulings

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