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SECTOR OVERVIEW 2007-08
In the preceding year, correction in a bullish market subsequently followed by bear market rallies was never apprehended to result in a widespread pessimism. Indian stock markets have really been on doldrums and is still trying to achieve a optimal and stable position. However, the apparent crisis has not stopped significant industrial sectors of Corporate India showing growth. The well said idiom “ Necessity is the mother of Invention” has significantly manipulated the key players of Indian capital market to innovate new financial instruments, investment strategies and alike. In the last year, Indian companies have used American Depository Receipts (ADRs), Overseas listing on AIM, SGX, LSE, etc, Global Depository Receipts (GDRs), Convertible Alternative Reference Securities (CARs), Foreign Currency Exchangeable Bonds (FCEBs) and Qualified Institutional Placements (QIPs).
Its Is not only SEBI who has contributed to the development of innovating by increasing the scope and application of its regulations, but other regulatory bodies like RBI, FIPB, etc have made significant contributions . With liberalization of FDI & ECB Policies, FII investments in the capital markets, which began in January 1993, increased from USD 1 million at end-March 1993 to USD 66.6 billion at end-March 2008. In addition, venture capitalists invested around USD 928 million in 80 deals for entrepreneurial companies in India in 2007. This was a 166 per cent increase over the USD349 million invested in 36 deals in 2006 – easily the highest total on record for the region.
Capital Market Practice
With Investment Bankers and Merchant Bankers trying to handle the crisis, the other key player who makes significant productive contributions to the capital market scenario such that subsequent investments do not generate suboptimal returns are the Capital Market Lawyers. However, law firms have not just worked on innovating new forms of financial instruments, instruments. A new arm of capital market practice better known as structured finance has become the bread and butter of many law firms who have advised clients on securitization, project finance, leveraged or management buy outs, etc. Capital market transactions involving corporate restructuring like takeovers, acquisitions, mergers and demergers buy back of securities, incorporation of mutual funds and venture capital funds, acting as advisers while for issuers, financial institutions and intermediaries such as stock brokers, underwriters, merchant bankers, portfolio managers and investors also form a chunk of the work of the firms committed in capital market practice.
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Growth in the capital markets and securities sector coincided with the establishment of the Securities and Exchange Board of India (SEBI) in 1992 to statutorily regulate the markets to protect investors and develop the sector. SEBI has effectively brought in a strict investor protection regime and various market reforms. Most IPOs issued since 1999 have benefited from SEBI regulation to now trade at a premium over the issue price. Modified regulations have enabled Indian companies to raise finances both domestically and internationally. The market has been transformed in the 16 years since SEBI took over. The present market features an advanced regulatory environment, modern market infrastructure, steadily increasing market capitalization, better allocation and mobilization of resources, a rapidly developing derivatives market, a robust mutual fund industry and increased issuer transparency.
Overseas Issuances attract the provisions of FDI and ECB accordingly . A lot of the structuring depends on the sectors in which the investment would be pooled as both ECB and FDI prescribes automatic and approval route for definite sectors. Under the FDI regime, pure equity or 100% equity convertibles are the only instruments allowed. Instruments like quasi equity have not gained popularity due to the limit on the rate of interest, prescribed by the ECB guidelines but companies are still going for syndicated loans and FCCBs for leveraging their capital.
At present, borrowers proposing to avail ECB up to USD 20 million for Rupee expenditure for permissible end-uses require prior approval of the Reserve Bank under the Approval Route. It has been decided that, borrowers in infrastructure sector may avail ECB up to USD 100 million for Rupee expenditure for permissible end-uses under the Approval Route and in the case of other borrowers, the existing limit of USD 20 million for Rupee expenditure for permissible end-uses under the Approval Route has been enhanced to USD 50 million.
DOMESTIC AND INTERNATIONAL MARKETS
The financial year ending March 2008 has seen a significant issuance of domestic instruments including like initial public offerings of equity or debt instruments, follow on offerings, rights issues, warrant issues, composite issues, preferential issues of securities, qualified institutional placements and Indian Depository Receipts.
While IPOs of Reliance Power, Cairns India, Edelweiss Capital, DLF, MCX added to the gloss and luster the scarred side of the coin also reveals the postponing of IPO of Wockhardt, Emaar MGF, undersubscribed IPOs and drastic change in behavioral finance. Rights issue by SEBI and Tata Steel stole the crown in the area of convertibles. However, a structured instrument Foreign Currency Convertible Alternative Reference Securities listed on the Singapore Stock Exchange - the first of its kind by an Indian company, aided the globalization of Tata Group by providing the necessary buy out funds.
With these developments, innovative structures of financial instruments have been evolved to protect against market volatility, investment restrictions and securities scams to hedge investment risks and other risks. New instruments like stapled securities, over-the-counter equity swaps, investment trusts, derivatives and convertibles are also gaining popularity.
The expedition for globalization will further increase the number of Indian companies going abroad for making capital issues and listing their stocks on international exchanges. With the Indian economy on a major growth traction, the need for further expansion and global recognition have been realized by significant activities with the use of foreign currency convertible bonds, depository receipts, Euro issues, AIM listings, foreign currency exchangeable bonds and other such new instruments. 12 Indian companies are already listed on NYSE besides two on Euronext. Satyam went for a cross-listing by joining Euronext besides NYSE. Listing on Singapore stock Exchange, Luxembourg Stock Exchange, Alternative Investment Market and various international capital markets by eminent Indian companies like Indiabulls, ICICI, Reliance Petroleum etc. has exposed many international law firms to Indian practice and vice versa.