We will not recommend that every company raise funds via depository receipts: Vikas Taimni

Interview with Executive Director (Head of Emerging Markets, Depository Receipts Group), JPMorgan

After a lull year, India Inc is expected to resume overseas fund raising through the depository receipts route in 2013. While fund raising via depository receipts is not meant for every company, to be a truly international company, one has to list in a global venue, Vikas Taimni, executive director - head of emerging markets, depository receipts group, JPMorgan, tells Manojit Saha. Edited excerpts:

Activity in the depository receipts market remained subdued in 2012. Do you expect the market to revive in the current year?
The depository receipts market is a subset of the broader capital market and is dependent on the overall buoyancy in the capital market.

Yes, 2012 was a low year compared to 2011, so far as equity issuances were concerned. A number of factors weighed on markets — both domestic and international.

Going forward, we think there will be less fear and more stability. There are signs of green shoots. The volatility index — VIX — was less than 20 in the last six months of 2012, which is a positive sign. We expect the second half of 2013 to be better than the first half as global GDP growth improves. But it will be a gradual improvement.

Are there signs of Indian companies’ interest coming back to raise funds via depository receipts (DR)?

We are getting an increasing number of queries from existing clients as well as prospects on DRs.

That said, we should remember that DR is not meant for everyone. We will not recommend that every company raise funds via DRs. The companies that will benefit from depository  receipts are those that either attract better valuation in the US or UK, want better analyst coverage, better visibility overseas, or are looking at an overseas listing as part of their broader long-term strategy or growth agenda.

Another reason why a company may choose to raise capital via DRs is if the company has exhausted its foreign institutional investor (FII) limit, and the only option for them is foreign direct investment (FDI). DR is considered as FDI.

Which are the companies that benefit from the DR route?
Companies from certain sectors typically benefit from higher valuations in the US or UK markets — sectors such as financial institutions and banks, metals and mining companies, technology companies and internet firms have historically enjoyed valuation premiums in overseas markets. These companies benefit from better analyst coverage and also because direct comparables for these businesses (especially for internet and new technology companies) are available in the US market versus the domestic market.

Are ADRs (American Depository Receipts) and GDRs (Global Depository Receipts) still the favourite among Indian companies?
Absolutely. As more Indian companies become truly international, they would want an international listing. In the 1980s and 1990s, as companies from Western Europe and Japan grew their operations internationally, they all looked at the US for a DR listing. The fundamental factors have not changed. The US and UK markets are the most attractive venues for global listings. If you want to become a truly international company, then you have to list and trade in an international venue.

What is the pipeline of DR issuances by Indian companies this year?
On the new listing side (initial issuances of DR), we expect at least five deals, if not more, from different sectors. Last year, three new companies raised funds via DRs (Raj Oils Mills Ltd, Industrial Investment Trust, Ram Kaashyap Investment Ltd). Fifteen new companies raised funds via DR in 2011. Year 2010 was a record year with 34 new companies listing overseas via DRs following the slow down immediately after the start of the financial crisis.

How do you compare Indian companies’ appetite for DR vis-à-vis its BRICS counterparts (Brazil, Russia, China and South Africa)?

Though we have seen $7 billion of capital raising via DRs from India in the past five years, overseas capital raising by Indian companies lags its BRICS counterparts. One of the reasons is because of the notion that the cost of compliance for overseas listing, especially following the introduction of the Sarbanese Oxley Act in 2004, are very high. The costs are not as high as people perceive them to be, and the benefits of an overseas listing either by way of improved valuations, better visibility or better corporate governance far exceed the costs. Which is why, close to 100 small- to mid-cap Chinese companies have listed themselves on the New York Stock Exchange or Nasdaq as DRs. There are only 11 Indian companies listed in the US market as DRs to date. We have some great companies in India and I think they could do more to market and position them overseas.