Indian Corporate Bond Market; Merchant Banking; IPO; Clause 49– A Perspective

ABHIJEET DESHMUKH

Capital Requirements

Government

IndividualsCorporates

Corporate Capital Funding Sources

Sources

External

Equity

Debt / Corporate

Debt

Bank Borrowings

Project Loans

Syndicated Loans

Working Capital

Trade FinanceBonds

Hybrid

Internal Accruals Reserves

Corporate Bonds - Basic Features

u Corporate Bonds are issued to the Public (similar to equityinstruments)

u Listed on Stock Exchanges and traded in Secondary Marketsu are Transferableu Can be Secured or Non-securedu possess a Broad Base of Issuers (ranging from small companies to

conglomerates and multinationals) and investors (including retailparticipants), and

u are under the additional purview of the Regulators of the SecuritiesMarket other than the Central Bank or other Banking Supervisor.

Corporate Bond Market Ecosystem -Three Main Pillars

The study of Corporate Bond Market is essentially the study of below three pillars, their roles, responsibilities and actions in the corporate bond market.

Institutions –Regulations & Governance

SEBI RBI

Credit Rating Agencies

Clearing Houses

Stock Exchanges

Participants

Investor (Demand Side)

Issuer(Supply Side)

Securities

Debentures (Fixed & Floating)

Securitized Instruments

Commercial Paper

Certificate of Deposit

Corporate Bond Market - Importance

u Corporate Bond market helps corporates funds at the low cost and takethe benefit of their credit rating without diluting equity.

u the corporate bond market in a country can substitute part of the bankloan market, and is potentially able to relieve the stressed banking system ina developing country of unbearable burden.

u When bank lending and corporate debt is more balanced in an economy,the market gets an opportunity to assert itself, thereby providing a moreeffective hedge against systemic / Market / un-diversifiable / volatility risk.

u Derivatives and Swap markets are critical for the development ofcorporate bond markets. These tools broaden the investor base and lendthe much needed liquidity to the market. These instruments also play apivotal role in reducing costs, enhancing returns and managing risk;particularly interest rate risk

Corporate Bond – Primary Placementu Bonds can be places as Public or Privately placed.u Market is dominated by the Private Placementu Private Placed Bonds are those where number of investors are not more

than 49, Min Investment is 25 lakhs and multiple of 10 lakhs thereafter.u Sample Term Sheet

Years Issues Amt (in '000 cr) % of Issue Issues2 Amt (in '000 cr)3 % of Issue22010-11 10 9.45 4.1% 1,404 218.79 95.9%2011-12 20 35.61 12.0% 1,953 261.28 88.0%2012-13 20 16.98 4.5% 2,489 361.46 95.5%2013-14 35 42.38 13.3% 1,924 276.05 86.7%2014-15 25 9.71 2.3% 2,611 404.14 97.7%

2015-(Aug15) 3 0.80 0.4% 1,509 216.11 99.6%

Public Issues Private Placements

Corporate Bond – Valuation/MTMu As per RBI Master Circular on Valuations -

“All debentures/ bonds should be valued on the YTM basis. Such debentures/bonds may be of different companies having different ratings. These will bevalued with appropriate mark-up over the YTM rates for Central GovernmentSecurities as put out by PDAI/ FIMMDA periodically. The mark-up will be gradedaccording to the ratings assigned to the debentures/ bonds by the ratingagencies subject to the following: -(a) The rate used for the YTM for rateddebentures/ bonds should be at least 50 basis points above the rate applicableto a Government of India loan of equivalent maturity.”

u The premium carried by a corporate bond over G-Secs represents theCredit Risk or Credit Premium. If the spread shrinks it denote bearish viewon yield / light supply side / higher yield demanded by the investor forbearing the risk.

Source:https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9027#371http://www.fimmda.org/modules/bonds/corporate-bonds.aspx?m=btd

IRR() for ValuationStock IDBI 2015

Coupon 9.35FV 100.00

Price 102.15Trans. Chgs 0.30

Maturity 31/12/15

9.35% IDBI 2015-102.15 1-Jan-10

9.35 31-Dec-109.35 31-Dec-119.35 31-Dec-129.35 31-Dec-13

109.35 31-Dec-148.80%Last IP 1-Jan-10Acc int 0.000Quote 102.15

Stock IDBI 2015Coupon 9.35

FV 100Price 102.15

Trans. Chgs 0.3Maturity 42369

0.0935 IDBI 2015=-(C20+C19) 40179

9.35 40543=(C13-C12)/365*$B$10*100 40908

9.35 41274=(C15-C14)/365*$B$10*100 41639

=(C16-C15)/365*$B$10*100+100 42004

=IRR(B11:B16,0.01)Last IP 40179Acc int =(C11-C18)/365*B10*100Quote 102.15

Credit Rating Scalesu Debt instruments rated 'BBB-' and above are classified as Investment Grade ratings.

Market Timings & Reporting Platformsu NSE

(http://nseindia.com/products/content/debt/corp_bonds/cbm_reporting_homepage.htm)

u BSE (http://www.bseindia.com/markets/debt/tradereport.aspx?expandable=0)

u FIMMDA – FTrac Information (http://www.fimmda.org/modules/content/?p=1030)

Market Timings & Holidays

u Market Hours are 9.30 AM to 17.30 and reporting hours are 10.00 to 17:30.

u Trades done till 17:30 but couldn’t be reported are required to be reported by 9:30 to 10 next day along with traded done post 17:30

u Either the buyer or the seller can report the trade, but the reporting party has to enter both sides of the deal.

u The party can use an id of your choice while reporting trades preferably NDS or CCIL ID. A confirmation email will be sent to both the email ids entered by the party.

(http://www.nseindia.com/products/content/debt/corp_bonds/mrkt_timing_holidays.htm)

International Securities Identification Number (ISIN)

u International securities identification number (ISIN) is a 12 character longcode, first two characters indicates Country Code as per ISO3166 (ForIndia it is IN).

u Third letter indicates type of security which can be E, A, F, B or 9 (E –Company, A/0 – Central Government Security, B- State GovernmentSecurity, F- Mutual Fund Unit and 9 represents Equity shares havingdifferent rights than those represented by INE number.)

u In the remaining 9 digits last digit is check suffix suing Double Add Doublemethod to check the validity of the International securities identificationnumber (ISIN)

u INE002A01018 – ISIN of Reliance IndustryIN – India; E- Company Type; 002A-Company Serial No of Reliance;01-Equity; 01-Issue Number; 8-Check Suffix

Corporate Bonds Market - Limitations (1/2)u Economic structure is a determinant of financial structure. Since India is a

predominantly services based economy, the financial structure automaticallyprefers equity market liberalization over debt market liberalization.

u the inconsistent, disorganized and overlapping institutional and regulatoryframework has been one of the primary reasons impeding the development ofstrong corporate debt markets in India.

u In India, a high level of public debt (Government Bonds) crowds out corporateborrowing by reducing the appetite of financial institutions. This increases the costof borrowing for corporates making bond markets an unviable source of funding

u absence of an adequately sized corporate debt market leads to an oversizedbanking system in any economy. It also results in a large portion of the lendingmarket being excessively regulated, &without being subjected to free marketforces, this becomes the perfect breeding ground for crony capitalism, sloppylending by banks and careless investments by corporates.

u The average maturity in the US bond market has lengthened in the recent pastand has been upwards of 12 years since 2007 whereas average age of the bondsissued by Indian corporations is only 5 to 7 years

Corporate Bonds Market - Limitations (2/2)u RBI observes that listed corporate debt forms only 5.4 per cent of GDP significantly low

compared to other emerging economies - Malaysia(43.1), Korea (77.5) & China (13).

u the supply side issues hampering the development of corporate debt markets in Indiaand lists the lack of diversity in instruments & issuers. The large issuers in the corporate debtmarket segment are “quasi-government” i.e. banks, public sector oil companies orgovernment sponsored financial institutions..

u On the equity side, management and controlling shareholders were largely in favour ofequity reforms and consequently allowed for more room for negotiation and agreement.On the debt side, changes were necessary to bankruptcy laws, labour laws and judicialenforcement. At the time of liberalization the base of political power in India was supportof labour unions and therefore any changes to labour or bankruptcy laws (allowing quickdismissal of labour) was not feasible.

u Foreign borrowings have also shown a healthy growth, indicating preference for cheaperforeign funds over costlier Indian debt markets. However, the recent depreciation inrupee exchange rate against major currencies has tremendously increased the foreignobligations of corporate and stressed corporate balance sheets.

Merchant Banking in India

Definition“Any person who is engaged in the business of issue management either bymaking arrangements regarding selling, buying or subscribing to securities asmanager consultant, advisor or rendering corporate advisory services in relationto such issue management.”

Introductionu Merchant bank is a financial institution (Large brokers, Mutual Funds,

Venture capital companies and Investment Banks offer MerchantBanking services.) that primarily deals with commercial banking needs ofinternational finance, long term loan for companies provides consultingservices and underwriting of stock.

u It also acts as an intermediary between the issuers and the ultimatepurchasers of the securities in the primary market.

u Merchant Banker are those financial intermediary involved with theactivity of transferring capital funds to those borrowers who areinterested in borrowing.

u They guarantee the success of issues by underwriting them. MerchantBanks are popularly known as “issuing and accepting houses”.

u Their activities are primarily non-fund based (Fee based).u It has been statutory brought with in the framework of the Securities and

Exchange Board of India (SEBI)

Services provided by Merchant Banku The management of the customer’s securitiesu The management of projects and counseling as well as appraisal u The circumvention of the syndication of loans u Management of the interest and dividend etcu Management of IPO issueu The management of underwriting of shares and debentures Portfolio

Managementu Advising on mergers and takeoversu Offshore finance

Historyu Merchant banking started in Italy in late medieval times (from the fifth to

the fifteenth century)u Reached in France during the seventeenth centuryu Italian merchant bankers introduces merchant banking into England in

eighteenth centuryu European bankers developed Merchant banking in USAu In 1972, merchant banking started in South Africa.History in Indiau Foreign bank National Grindlays Bank started merchant banking in 1967u Then Citibank in 1970 and State Bank of India in 1972 started Merchant

bankingu Later ICICI setup its merchant banking division followed by Bank of India,

Bank of Baroda etc..

Merchant bankers categories

• Issue Management• Advisor• Consultant• Manager• Underwriter• Portfolio manager

• Advisor• Consultant• Co manager• Underwriter• Portfolio Manager

• Advisor• Consultant• Underwriter

• Advisor• Consultant

Category - 1 Category - 2 Category - 3 Category - 4

Capital Adequacy NormsA merchant bank will be registered by SEBI in different categories on thebasis of capital adequacy norms in terms of its “Net worth”.

Category Minimum amountCategory 1 5,00,00,000Category 2 50,00,000Category 3 20,00,000Category 4 NIL

Appointment of Lead Merchant Banker

Size of Issue No of Merchant Banker

Less than INR 50 Cr Two

INR 50 Cr to INR 100 Cr Three

INR 100 Cr to INR 200 Cr Four

INR 200 Cr to INR 400 Cr Five

> INR 400 Cr As may be agreed by the Board

Registration with SEBI

Application for grant

certificate

Information furnishing,

clarification and

personal

Application consideration

Granting the

certificate

Payment ofRegistration

fees

Registration Feeu A ‘MB’ has to pay a fee at the time of original registrationu Category I Rs. 10 Lakhsu Category II Rs. 5 Lakhsu Category III Rs. 1 Lakhu Category IV Rs. 5,000

u The certificate of registration granted under regulations shall be validfor a period of three years from the date of its issue to the applicant.

u The certificate of renewal granted under regulation 9, shall be valid for aperiod of three years from the date of its issue to the applicant.

Methods of Placementsu Underwriting is insurance for the new securities of the public. It is one of the

methods of marketing securities.u The other methods are: Prospectus method, where the capital is raised by

this method is very prevalent in India. The distribution expenses may besubstantially saved.

u Offer for sale, where the sales are sold largely to the brokers/issue houses.The issue house/brokers again sell the shares to the public at a fixed price.This method saves the company the cost and the trouble of selling theshares to the public. Here a Third party takes over the responsibility.

u Private placement, where the funds are raised in the primary market by selling the security issue to one investor or a small group of investors without resorting to underwriting. The cost of the issue is minimal. It is the most effective way of procuring the long term funds. There is no need to follow the statutory formalities. The offer is made to select a group of known persons.

Underwritingu Underwriting is a guarantee given by the underwriters to take up whole

or part of the issue of securities at a given price not subscribed by thepublic for a commission.

u The agreement between the issuing company and the financialintermediary, called the underwriter, where by sale of certain quantumof securities is guaranteed for the issuing company, is known asunderwriting agreement.

u It facilitates the provision of money during the financial crisis of thecompany an alternative to Bank Borrowings.

u The Underwriter helps the new company in its reorganization /recognition.

u To act as an Underwriter, a certificate of Registration must be obtainedfrom SEBI, after payment of prescribed fee to SEBI.

u Underwriters are appointed by the issuing companies in consultationwith the Lead Manager or Merchant Banker to the issue and many atime both Merchant Banker and Underwriter are the same entity.

Underwriting Agreements u Firm Commitment:

Firm commitment is the most commonly used type of underwriting contract. The underwriter agrees to buy securities from the issuing corporation and pay the proceeds to the company. Any losses that occur due to unsold shares are prorated amongst the participating underwriting firms according to their proportional participation.

u Best Efforts:Best efforts underwriting allows the firm (or underwriting syndicate) to act as agent for the issuing corporation and limits the responsibility of that firm to the shares it is able to sell. All unsold shares are absorbed by the issuer

u All or None:All or none underwriting allows the issuing corporation to contract for the sale of all shares. If any shares remain at the end of the underwriting process, the underwriting is cancelled. Underwriters cannot deceive investors by stating that all of the securities in the underwriting have been sold if it is not true.

u Standby:Stand by underwriting allows an underwriting firm (or syndicate) to wait in the wings in an additional offering for any unused pre-emptive rights that are not executed by the company’s current shareholders. The underwriter will purchase the unused rights, exercise them and sell the shares.

Underwriting Commissionu Underwriting commission is payable on the basis by the issuer

corporation on the basis of commission rates prescribed by SEBI

a) Equity shares 2.5% 2.5%b) Preference, Convertible and non convertible debenturesUp to Rs 5L 2.5% 1.5%Exceeding Rs 5L 2% 1%

On amounts in developing the

underwriter

On amounts Subscribed by the

public

SEBI GuidelinesAccording to the SEBI guidelines the following factors are to be fulfilled:u The minimum requirement of 90% subscription is mandatory for each issue

of capital to the public. This clause is applicable for both public and rightsissue.

u If the company is not able to receive the issued amount from the publicsubscription and accepted development from the underwriters, then thecompany refunds the amount.

u In order to standardize the legal relationship between the issuingcompany and the underwriters, the SEBI has formulated the modelunderwriting agreement. The underwriting agreement should be filed withthe stock exchanges.

u The registration number of the underwriter is to be quoted in allcorrespondence with the SEBI, government authorities and clients.

u The total underwriting obligations under all the agreements should notexceed twenty times the network of the underwriter

Debt Issue Management - Summaryu Corporates approach Merchant Banker with Amount they wish to raiseu They discuss Business Plan/Project Feasibility/Collateral offered.u Merchant Bankers appraise Issuer with current market trends / rates /

appetite / psychology of investor, market and competition.u Merchant Banker prepares a Action Plan including Financial plan

comprising cost of raising and other expenses, Regulator complianceplan, Procedural Appointment of Intermediary/Underwriter/distributor andmost important the Price of the Issue.

u Prepares the prospectus and submit with SEBI and takes care of allregulatory requirements

u Based on type of placements, appoints underwriteru Involved in Security listing, ISIN creation by appoint Registrar and Transfer

agent, Depository (NSDL/CDSL)u Provide the Amount to Issuer and get the fees/ Underwriting commission

Equity Issue Management - SummaryHow does an IPO take place?u When a company wants to go public, the first thing it does is hire a

financial advisor or an investment bank to manage the public issue.u The company and the investment bank meet to discuss the amount of

money the company would raise, the type of securities to be issued, andall details in the underwriting agreement

u The underwriter puts together what is known as the RED HERRINGprospectus. For Ex Throcare Draft Red Hearing Prospectushttp://www.sebi.gov.in/cms/sebi_data/attachdocs/1451886138156.pdf

u This is an initial prospectus containing all the information about thecompany except for the offer price and the effective date not known atthat time.

u With the red herring in hand, the underwriter and company attempt tofind the appetite for shares. They go on a road show to tap institutionalinvestors.

Equity IPO Process & Merchant Banker

IPO (Initial Public Offering)For Funding Needs

u Funding Capital Requirements for Organic Growthu Expansion through Projectsu Diversificationu Funding Global Requirementsu Funding Joint Venture and Collaborations needsu Funding Infrastructure Requirements, Marketing Initiatives and Distribution Channelsu Financing Working Capital Requirementsu Funding General Corporate Purposesu Investing in businesses through other companiesu Repaying debt to strengthen the Balance Sheetu Meeting Issue Expenses.

For Non-funding Needsu Enhancing Corporate Statureu Retention and incentive for Employees through stock optionsu Provide liquidity to the shareholders

IPOIssue Typesu Fixed PriceIn a 'Fixed Price' shares are sold at a single price/fixed price.

This price is determined by the company in advance, and you (the buyer)can buy the shares only at that decided price. E.g. If XYZ IndustriesLimited decides to make a public issue of 10,00,000 equity shares at aprice of Rs. 65/- you can buy the share at Rs. 65/- and cannot ask for aprice of Rs. 60/-

u Book Building Issue'Book Building' is a price discovery mechanism usedto determine the price of the security proposed to be issued. 'BookBuilding Issue' is generally used when the issuer doesn't want to fix a certainprice on the security. Here, unlike the 'Fixed Price Issue', you (the bidder)have the facility to bid for the shares within the given range/price band.E.g. If XYZ Industries Limited decides to make a public issue of 10,00,000equity shares, it will, instead of a fixed price, announce the price band ofRs. 60/- to Rs. 70/-. You (the bidder) can then place your bids for the sharesbetween this price band/range.

Book Building Process:u The Issuer who is planning an offer nominates lead merchant banker(s) as 'book

runners'.u The Issuer specifies the number of securities to be issued and the price band for the

bids.u The Issuer also appoints syndicate members with whom orders are to be placed by the

investors.u The syndicate members input the orders into an 'electronic book'. This process is called

'bidding' and is similar to open auction.u The book normally remains open for a period of 5 days.u Bids have to be entered within the specified price band.u Bids can be revised by the bidders before the book closes.u On the close of the book building period, the book runners evaluate the bids on the

basis of the demand at various price levels.u The book runners and the Issuer decide the final price at which the securities shall be

issued.u Generally, the number of shares are fixed, the issue size gets frozen based on the final

price per share.u Allocation of securities is made to the successful bidders. The rest get refund orders.

IPOTypes of Applicantsu Retail Individual Investor:- means an investor who applies or bids for

securities of value not more than Rs. 2,00,000/-u Non-Qualified Institutional Buyer: means an investor who bids for an

amount above Rs. 2,00,000/- and does not fall in the QIB category e.g. HNIinvestors.

u Qualified Institutional Buyer(QIB) means:u Public financial institution as defined in section 4A of the Companies Act, 1956

u Scheduled commercial banks

u Mutual funds/venture funds/insurance companies/provident funds

u Foreign Institutional Investor registered with SEBI

IPOWays of Applying for an IPOu You can invest in IPOs only through ASBA.u Using ASBA, you can invest in public issues by authorizing the bank to block

an amount equivalent to the application amount in the linked bank account.

u The application amount is not debited from the account but remains blocked till the completion of allotment process.

u On allotment, amount required will be debited from the bank account whereas in case of partial or no allotment, the amount unutilized due to non-allotment will be released.

Noteu SEBI ASBA FAQ

Detail IPO Processu The IPO process in India consists of the following steps: -

u Appointment of merchant banker and other intermediariesu Registration of offer documentu Marketing of the issueu Post- issue activities

Step -1- Appointment of Merchant Banker u Appointment of Merchant Banker and Other Intermediaries

u One of the crucial steps for successful implementation of the IPO is theappointment of a merchant banker. A merchant banker should have avalid SEBI registration to be eligible for appointment.

u A merchant banker can be any of the following – lead manager, co-manager, underwriter or advisor to the issue.

u Certain guidelines are laid down in Section 30 of the SEBI Act, 1992 onthe maximum limits of intermediaries associated with the issue:

Size of the Issue No. Of lead Managers

50 cr. 2

50 – 100 cr. 3

100 – 200 cr. 4

200 - 400 cr. 5

Above 400 cr. 5 or more as agreed by the board

Step -1- Appointment of Merchant Banker u Certain guidelines are laid down in Section 30 of the SEBI Act, 1992 on the

maximum limits of intermediaries associated with the issue:u The number of co- managers should not exceed the number of lead

managers.u There can only be one advisor/consultant to the issue.u There is no limit on the number of underwriters.u Other Intermediaries

u Registrar to the Issue: Registration with SEBI is mandatory to take onresponsibilities as a registrar and share transfer agent. The registrarprovides administrative support to the issue process. The registrar of theissue assists in everything from helping the lead manager in theselection of Bankers to the Issue and the Collection Centers topreparing the allotment and application forms, collection ofapplication and allotment money, reconciliation of bank accountswith application money, listing of issues and grievance handling.

u

Step -1- Appointment of Other Intermediariesu Bankers to the Issue: Any scheduled bank registered with SEBI can be appointed as

the banker to the issue. There are no restrictions on the number of bankers to theissue. The main functions of bankers involve collection of application forms withmoney, maintaining a daily report , transferring the proceeds to the shareapplication money account maintained by the controlling branch, and forwardingthe money collected with the application forms to the registrar.

u Broker To the Issue: Any member of a recognized stock exchange can become abroker to the issue. A broker offers marketing support, underwriting support,disseminates information to investors about the issue and distributes issue stationeryat retail investor level.

u Underwriters to the Issue: Underwriting involves a commitment from the underwriterto subscribe to the shares of a particular company to the extent it is undersubscribed by the public or existing shareholders of the corporate.

u An underwriter should have a minimum net worth of 20 lakhs, and his totalobligation at any time should not exceed 20 times the underwriter’s net worth. Acommission is paid to the underwriters on the issue price for undertaking the risk ofunder subscription.

*BRLM – Book Running Lead Manager

*BRLM – Book Running Lead Manager

Step 2 - Registration Of The Offer Documentu For registration,10 copies of the draft prospectus should be filed with SEBI. The

draft prospectus filed is treated as a public document.u The lead manger also files the document with all listed stock exchanges.

Similarly, SEBI uploads the document on its website www.sebi.com. Anyamendments to be made in the prospectus should be done within 21days offiling the offer document. Thereafter the offer document is deemed to havebeen cleared by SEBI.

u Promoters Contribution: In the public issue of an unlisted company, thepromoters shall contribute not less than 20% of the post issue capital as given inChapter- IV of the SEBI Act, 1992.The entire contribution should have beenmade before the opening of the issue.

u Lock-in Requirement: The minimum promoters contribution will be locked in fora period of 3 years. The lock-in period commences from the date of allotmentor from the date of commencement of commercial production, whichever isearlier.

Step 3 – Marketing/Timing of the Issueu An appropriate decision regarding the timing of the IPO should be made,

keeping in mind the general sentiments prevailing in the investor market.For example, if recession is prevailing in the economy (the investors arepessimistic in their approach), then the firm will not be able to get a goodpricing for its IPO, as investors may not be willing to put their money instocks.

u Retail distribution: Retail distribution is the process through which anattempt is made to increase the subscription. Normally, a network ofbrokers undertakes retail distribution. The issuer company organizes roadshows in which conferences are held, which are attended by high networth investors, brokers and sub-brokers. The company makespresentations and solves queries raised by participants. This is one of thebest ways to raise subscription.

u Reservation in the Issue: Sometimes reservations are tailored to a specificclass of investors. This reduces the amount to be issued to the generalpublic

Step 3 - Marketing of the Issueu The following are the classes of investors for whom reservations are made:

u Mutual Fundsu Banks and Financial Institutions; Non-resident Indians (NRI) and

Overseas Corporate Bodies (OCB) The total reservation for NRI/OCBshould not exceed 10% of the post-issue capital, and individually itshould not exceed 5% of the post issue capital.

u Foreign Institutional Investors (FII): The total reservation for FII cannotexceed 10% of the post-issue capital, and individually it should notexceed 5% of the post issue capital.

u Employees: Reservation under this category should not exceed 10% ofthe post issue capital.

u Group Shareholders: Reservation in this category should not exceed10% of the post issue capital.

The net offer made to the public should not be less then the 25% of the totalissue at any point of time

Step 4 - Post-Issue Activitiesu Principles of Allotment: After the closure of the subscription list, the

merchant banker should inform, within 3 days of the closure, whether 90% ofthe amount has been subscribed or not. If it is not subscribed up to 90%,then the underwriters should bring the shortfall amount within 60 days.

u In case of over subscription, the shares should be allotted on a pro-ratabasis, and the excess amount should be refunded with interest to the sharesholders within 30 days from the date of closure.

u Formalities Associated With Listing: The SEBI lists certain rules and regulationsto be followed by the issuing company. These rules and regulations are laiddown to protect the interests of investors. The issuing company shoulddisclose to the public its profit and loss account, balance sheet, informationrelating to bonus and rights issue and any other relevant

Clause 49u The term ‘Clause 49’ refers to clause number 49 of the Listing Agreement between a

company and the stock exchanges on which it is listed and it comes into effect from 31December 2005. It has been formulated for the improvement of corporategovernance in all listed companies.

u Corporate Governance may be defined as “A set of systems, processes and principleswhich ensure that a company is governed in the best interest of all stakeholders.”

u Corporate Governance is about promoting corporate fairness, transparency andaccountability. Good Corporate Governance is simply Good Business.

u as made major changes in the definition of independent directors, strengthening theresponsibilities of audit committees, improving quality of financial disclosures, includingthose relating to related party transactions and proceeds from public/ rights/preferential issues, requiring Boards to adopt formal code of conduct,requiring CEO/CFO certification of financial statements and for improving disclosures toshareholders. Certain non-mandatory clauses like whistle blower policy and restriction ofthe term of independent directors have also been included

u http://www.sebi.gov.in/commreport/clause49.html

New Product – Masala BondsMortgage lender Housing Development Finance Corp (HDFC) has raised Rs 3,000crore by issuing masala bonds; the first company to do so since the RBI green-flaggedit in September last year.

u What exactly are masala bonds? These are rupee-denominated borrowings byIndian entities in overseas markets. Usually, while borrowing in overseas markets,the currency is a globally accepted one like dollar, euro or yen.

u What is the advantage of borrowing abroad in rupees? Companies issuing masalabonds do not have to worry about rupee depreciation, which is usually a big worrywhile raising money in overseas markets.

u Is that a big enough advantage? Of course. Quite a few Indian companies thathad raised money abroad in 2007 by issuing Foreign Currency Convertible Bondsfound themselves in a soup when the rupee depreciated sharply following theglobal financial crisis.

u What is in it for the buyer of the bond? The buyer will earn a higher yield (couponrate) to compensate for the risk of currency depreciation.

New Product: Masala Bondsu What is the tenor and coupon rate on the HDFC Masala bonds? The bond bears a

fixed semi-annual coupon of 7.875 percent per annum and has a tenor of 3 yearsand 1 month. The bonds have been issued at a price of 99.24% of the par valueand will be redeemed at par. The all-in annualized yield to the investors is 8.33percent per annum.

u Will the bonds be traded? Yes, but on the London Stock Exchange, not in India.

u Will there be more such bond issuances by other companies? According to UtpalOza, MD and Head of Investment Banking, Nomura India —the banker to the HDFCissue — post Brexit, both Asian and European investors are hunting for yield andmasala bonds seem to be offering them an attractive yield pickup. He says manypublic and private corporates are in the fray to issue masala bonds in the comingmonths, due to the hitherto untapped, deep alternate investor base that they giveaccess to at marginally higher cost of financing.

Source: http://www.moneycontrol.com/news/bonds-news/explained-whatmasala-bondshow-do-indian-cos-benefit_7043101.html?utm_source=ref_article

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