Indian investment banking transforms itself

At the dawn of the decade, numerous confidence-building measures attracted the global financial community to India. Regulatory, monetary and policy reforms coupled with arguably the most robust banking system among the emerging Asian economies, made market participants confident about investing in a geography earlier known for its bureaucracy and license regime.

Steps such as the introduction of F&O [futures and options], a rolling settlement system and the opening of foreign investment gates in sensitive sectors resulted in a significant increase in both primary investments and secondary market depth (combined average daily turnover on the National Stock Exchange increased from $1.2 billion in fiscal 2001 to over $19 billion in fiscal 2010).

Increased involvement by private equity (PE) in unlisted companies and by foreign institutional investors in the secondary markets helped India to imbibe a culture high on corporate governance and professionalism. Many Indian corporates started following the venture capital-private equity-IPO route instead of 'jumping-the-gun' with a listing. Family-run businesses modified their set-up with a CEO who was either an educated second generation family member or a professional at the helm of affairs to cater to the global challenges.

The rise of relatively unknown sectors like pharmaceuticals, real estate and private sector power projects with no existing businesses led to a new level of challenges with regard to the valuation necessitating unique products. As corporates became amenable to the involvement of PE, convertible structures like foreign currency convertible bonds (FCCBs) and warrants replaced plain-vanilla equity infusion.

In 2008, PE was badly hit as credit markets froze, depriving them of asserting their dominating influence on the capital markets. As buyouts became untenable, the broader PE industry focused more on VC, distressed debt, real estate and infrastructure plays in emerging economies. In the preceding two years (2006 and 2007) which fed the sub-prime crisis, PE players were keen investors in PIPE [private investment in public equity] transactions across emerging economies as bullish markets gave rise to desperation of riding the wave. While the period between 2004 and 2006 saw PE deals worth over $10 billion, the next three years witnessed deals aggregating more than $22 billion.

The decade saw Indian corporates growing in size and also marked an increase in outbound M&A activities led by large business conglomerates. Global names like Jaguar-Land Rover, Tetley, Corus, Axon and Novelis became 'India-owned brands'. Equally interesting, the mega-deals happened in sectors beyond information technology and financial services. Aggressive acquisition themes and organic global footprints increased the need for funding at competitive rates that were free from vagaries of currency fluctuation.

Introduced by the Reserve Bank of India in the nineties, FCCBs proved a boon for corporates with ongoing global aspirations. While the years from 2001 to 2005 saw 87 FCCB deals worth $7 billion, the next two years registered 144 deals, with more than $13 billion raised from the instrument. Then the global meltdown and the resultant fall in the stock prices made investors wary of the instrument, which gave rise to buyback possibilities for opportunistic companies that would have otherwise struggled to arrange funds for the redemptions.

In 2006, qualified institutional placements (QIPs) were introduced, perhaps the most efficient mode of fundraising for listed Indian companies. Besides reducing the legal hassles around fundraising, QIPs helped to reduce excess dependence on foreign capital sources like ADRs/GDRs [American and  global depositary receipts]. The inherent benefits in a bull market saw corporates queuing-up for QIPs both in 2006 ($900 million raised) and 2007 ($5 billion raised). As India got re-rated as an investment destination after the general elections last year, 53 deals worth $8.5 billion were registered on account of a huge surge in liquidity.

Risks of promoters losing control gave birth to products like differential voting rights, a product widely used in developed markets. In 2008, Tata Motors became the first Indian company to issue this product. However, subsequent provisions have made any public issuance of differentials untenable. In 2008, when corporates were struggling for funds, costlier methods of fundraising, like public issues of non-convertible debentures, also found favour.

New avenues continue to be explored but the evergreen IPO still enchants companies and investors alike. Dynamic changes like 100% book-building, anchor investments and a modified French auction mechanism have helped product evolution and aside from the slack period in 2008, IPOs continued to be the preferred form of fundraising. While the years from 2001 to 2005 saw deals worth $13 billion, the second half of the decade has already seen $30 billion raised from investors. This is the most conspicuous acknowledgement of the buoyancy of the Indian economy and the maturity of the Indian financial market.

As growth in the US and Europe stagnates, India is well positioned as a top investment destination for investors seeking sustainable returns. With the RBI reworking the roadmap for achieving fuller capital account convertibility, India should aspire to become a listing destination for corporates across the globe. In what could be a precursor of things to come, Standard Chartered became the first overseas company to opt for an Indian depositary receipt issue in May this year. Going forward, IDRs are expected to find favour, initially as a measure of gaining increased visibility and brand equity in India. We are in for exciting times ahead!

A. Murugappan is an executive director of domestic investment bank ICICI Securities.