'As markets stabilise, public offers will return'

Q&A: Munish r varma, Deutsche Bank Global Markets (India) MD

Deutsche Bank has just completed Axis Bank’s $720-million fund-raising programme involving sale of shares to institutional investors and a global depository receipt (GDR) issue. It has also helped Indian companies raise $4.5-billion (Rs 21,600 crore) debt and $2.2 billion (Rs 10,560 crore) of equity capital during the January-September period. In an interview, Deutsche Bank Global Markets (India) Managing Director Munish R Varma tells Abhijit Lele and Sidhartha that foreign resource flow will improve in the days ahead. Excerpts:

What is the reason for the recent spurt in fund-raising by companies?
In terms of liquidity, there seems to be enough in the system to fund growth plans of well-run businesses. As the economy revives, companies will need money to fund their expansion plans, strengthen their balance sheets and leverage opportunities arising in the market. Today, for the right company, raising funds is not a problem as long as they set the right deal parameters.

vThough at a slower pace, demand is picking up and there seems to be some unused capacity, especially in manufacturing. Are Indian companies raising equity to take care of leverage or to fund expansion?
It is due to a combination of the two factors. In some cases, companies are raising money for expansion and growth, and in others, it is to reduce leverage and strengthen their balance sheets.

Is there still an aversion to certain sectors?
While most sectors have shown an improvement in performance over the last few months, certain others have outperformed the rest. Sectors depending on domestic consumption have done better than export-related ones.

What about real estate?
Real estate companies have raised a significant amount of capital recently. As mentioned earlier, for companies operating in right sectors with appropriate deal structures, there is demand in the market.

Most companies seem to be opting for qualified institutional placements (QIPs), but HDFC recently opted for a warrant-cum-non-convertible debenture issue. Are we seeing a shift towards the use of new instruments?
Yes, in a way. A dialogue is on between issuers and borrowers about how you hedge risk and how you manage it. Only if it serves the purpose of a company, they will opt for a particular instrument. I don’t think companies will use ‘new’ instruments for the sake of using them. It has to make sense to the company as well as to the investor. QIPs are now tried and tested; people are aware that they work well. But for some firms, it could make sense to go in for non-convertible debentures (NCDs) or warrants.

Do you see companies using follow-on public offers (FPOs) to raise funds or will they stick to QIPs?
Companies have to decide on what is the ideal mix for them in terms of retail and institutional investors and the speed at which they want to raise funds. While QIP is a proven method to raise funds quickly, initial public offerings (IPOs) and FPOs will come back as markets stabilise and the appetite for greater risk returns.

Recent listings have been flat and, in some cases, shares are trading below the issue price. Is pricing an issue?
I do not think that pricing is an issue. On the contrary, companies could have priced issues slightly cheaper, but the fact is that these issues were over-subscribed.

Have external commercial borrowing (ECB) and foreign currency convertible bond (FCCB) markets revived?
There have been limited international bond issuances from India in the last 12 months, but as markets revive and investor appetite for Indian papers grows globally, we will see greater issuances of ECBs and FCCBs from India as there is an expectation that the worst is behind us.

Over the last 18 months, there has been a huge volatility in the currency markets. Has that changed the way companies hedge?
It has not changed the way companies hedge, but it has made them more aware of their exposure. There is much more awareness among companies now on hedging their currency risks. Increasingly, we are in discussion with borrowers on how they can borrow the right amount with the right tenor and alongside manage the associated forex and interest rate risks.