The international debt and equity markets are an attractive resource for Indian companies to access capital at interest rates that are lower than the prevailing rates in India, as well as for investors that are capital rich and have an appetite for high growth with moderate risk markets such as India. The avenues mentioned below are usually available for Indian companies looking to raise capital in the global markets.
External commercial borrowings (ECBs) covers debt that Indian companies obtain from banks, financial institutions, private lenders, supplier’s credit and equity partners or corporate entities connected with the Indian company. Up to US$750 million can be raised from banking and related channels through the automatic route, i.e. without approval from the Reserve Bank of India (RBI).
Equity is the most preferred means of raising funds for expansion and new projects without any direct cost or any currency risk. It is also an excellent means for foreign investors to gain from the Indian market with the maximum control over their investment.
Bond markets are a creative option for Indian businesses to raise funds. Three avenues are available: (1) foreign currency convertible bonds (FCCBs); (2) foreign currency exchangeable bonds (FCEBs); and (3) American depository receipts (ADRs) and global depository receipts (GDRs).
FCCBs are an excellent option where the investors can choose to keep getting a fixed rate of return as debt and after a pre-decided period can exercise the option of getting equity in the company that has issued the bonds. The funds are raised and repaid in foreign currency with the issuing company bearing the exchange risk.
FCEBs are similar to FCCBs with the additional option to issue the equity in a subsidiary or special purpose vehicle of the company raising funds. This gives immense flexibility to use the parent company to guarantee the new project and raise funds in the new project. FCEBs however need to be approved by the RBI before the issue.
ADRs/GDRs can be issued by an Indian listed company against its own shares by listing on a US or any other international stock exchange or through private placement. Although currently unpopular because of the recent currency risks, this is still it is the best option for Indian companies since the bonds are denominated in Indian rupees, ensuring there is no currency risk to the Indian company.
Who can raise what?
Most manufacturers, infrastructure projects, mining companies, microfinance institutions, low-cost housing projects, hotels, hospitals, and software/information technology ventures are permitted to raise funds via the ECB and bond routes.
Nearly all sectors can raise equity funds without much constraint except some sensitive sectors such defence, insurance, aviation, etc., where sectoral limits are prescribed.
Overseas funds cannot be raised for real estate, on-lending and related financing. Such funds also cannot be raised for the purchase of land as such, for financing business acquisitions, or for corporate operations such as working capital and repayment of existing loans (except in specified sectors).
Amounts, tenure and rates
Amounts above US$750 million require approval by the RBI for both ECBs and the bond market. There are no real limits or restrictions on equity.
There are no limitations on tenure for investments to be brought in or taken out through the equity route. For ECBs, the average maturity needs to be at least three years. For bond issues of up to US$20 million the average maturity period should be at least three years and for FCCB and FCEB issues of US$20 million-750 million the average maturity period should be at least five years.
Interest rates are 3.5% plus six-month Libor for an average maturity period of three to five years and 5% plus six-month Libor for an average maturity period above five years.
To raise ECBs, the company should not be barred from raising funds in India or be on any default or caution list. For equity, the company should not be on any caution list or under investigation for any criminal activity. For bonds, the company should be listed or must list simultaneously with the overseas bond issue and should not be barred from raising funds in India.
ECBs can be brought in only from recognized lenders such as international banks, international capital markets, multilateral financial institutions, export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders. All ECB agreements must be registered with the RBI through the company’s bank/authorized foreign currency dealer. All overseas equity investments must be reported to the RBI using the prescribed forms. For bonds, an escrow bank account must be set up for collection of funds abroad and the following appointments need to be made: Indian legal adviser; Indian accountants; Indian custodian; lead manager; depository bank; overseas legal adviser.
Gautam Khurana is the managing partner at India Law Offices in New Delhi.
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