Description
This is a PPT that includes topics like sources of funds,forex considerations,government policies,perceptions of investors,market trends,CAPM,ECB,ADR,FCCB,LBO,M&A deals
?
Source of funds / avenues for investment
? Identifying the right sources of funds
? plethora of options (country, method, nature)
? Identifying the right avenues for investment
? many options (geography, form)
?
Conversion of foreign currency to INR or conversion of INR to foreign currency
? Managing attendant exchange rate risks
? ?
Source of Funds Country Equity / debt
? Debt
? Loans / bonds ? Fixed rate / floating rate / zero coupon ? Convertible / nonconvertible ? With or without embedded options ? Listing exchange
Avenues for Investment ? Country ? Equity / debt
? Equity ? Debt
? 100% or lower percentage ? JV ?
? Listed / unlisted
? Public / private placements
? Listed / unlisted ? Cash deal or otherwise
? Loans / bonds ? Fixed / floating rate / zero coupon ? Convertible / nonconvertible ? With or without embedded options
?
Both funds raised abroad and funds invested abroad give rise to exchange rate risks
? These risks need to be managed
USD vs INR
?
Funds raised abroad have attendant exchange rate risks while repaying principal or paying corporate action benefits Funds invested abroad have attendant exchange rate risks while divesting or receiving corporate action benefits
?
?
To avail of
? alternate sources of funds for domestic use
? lower cost of funds
?
To utilise foreign funds directly
?
To
? ? ? ?
for for for for
import of assets acquisitions abroad greenfield projects abroad investments in assets abroad
? enhance prestige of companies ? create confidence amongst investors
? ? ? ?
? satisfy demand among foreign investors ? improve valuations
Stringent listing guidelines Stringent initial and continuous disclosure norms Stringent corporate governance norms Stringent accounting norms
?
Use of foreign currency and consequent risk of exchange rate fluctuation
? One has to convert foreign currency to local currency to use the funds raised abroad
? One can, ofcourse, directly use foreign currency abroad for investments, acquisitions or other purposes
? One has to ‘buy’ foreign currency (convert local currency to foreign currency) for repayment of funds sourced abroad and for payment of corporate benefits
? ? ? ? ?
Domestic Country’s Government Policies Foreign Country’s Government Policies Perceptions of Investors and Market Trends and Practices Cost Considerations
? ? ? ? ? ? ?
Corporates Banks and other Financial Institutions High Networth Individual Investors Retail Investors Private Equity Hedge Funds Pension Funds
?
Equity
? Depository Receipts
? GDRs and ADRs
?
Debt
? Bonds ? Money Market Instruments ? Other forms of Borrowings
?
Normally equity issued as Depository receipts (DRs)
? Global Depository Receipts (GDRs) ? American Depository Receipts (ADRs) ? Indian Depository Receipts (IDRs)
? ? ? ?
1 DR = 1 or < 1 or > 1 equity share of issuer DRs may or may not be listed DRs may or may not have voting rights DRs may be issued by the company that has issued the underlying equity or some other agency
? Sponsored DRs ? Unsponsored DRs ADRs
? ? ? ? ?
Bonds may be denominated in local currency or foreign currency Bonds may or may not be listed Bonds may have embedded options Bonds may be offered with warrants Bonds may be convertible or partially convertible
? Callable or Puttable bonds
? Bonds are generally OTC traded
?
?
?
Commercial Paper (CP) may be denominated in local currency or foreign currency CPs are usually negotiable in the OTC markets Banks and institutional investors invest in CPs
? ?
Public Offers Private Placements
?
Corporates may be allowed to use funds raised abroad in the same foreign country for various purposes
?
?
May be required to remit funds to home country immediately or within specified number of days May be allowed to retain funds abroad for future use
?
Restrictions may be present on repatriating capital and/or remitting dividends and interest
? Time ? Quantum ? Mode
?
Use of derivatives
? ? ? ?
100% Acquisitions of corporates Creation of wholly owned subsidiaries Joint ventures Portfolio investments
? ?
Why do corporates resort to overseas acquisitions ? Pertinent Aspects
? Various strategic reasons ? Regulatory regime ? Investment channels ? Funding options
? Regulations of both Governments
? Direct or through subsidiaries/associates in home country or foreign country or tax havens
? Internal resources, borrowings from home or foreign country, equity from home or foreign country, stock swaps, LBOs
? Currency considerations impacting cost of acquisition
? ?
Already discussed earlier Some examples
? ? ?
Direct by acquiring company Through subsidiaries / associates in home country Through subsidiaries / associates in foreign country Through subsidiaries / associates in tax havens
? (eg) TVS Motors set up a company in Indonesia through its subsidiary in Singapore
?
? (eg) 2006 – Welspun India acquired British brand ‘Christy’ – a subsidiary in Cyprus, a tax haven, was created for the acquisition back
?
Policies relating to
? countries from which funds can be raised ? quantum of funds that can be raised
? geographical limits ? sectoral limits ? individual company limits ? types of financial instruments that can be used
? equity, preference, fixed-income securities ? convertible instruments, bonds with warrants ? currency specifications
? mode of raising funds
?
Policies relating to (contd.)
? ? ? ? ? ? ? limit on periods for which funds can be raised types of investors from whom funds can be raised repatriation of capital / principal remittance of corporate action benefits further investment in rights / bonus voting rights of investors in case of equity witholding tax on corporate benefits
?
Policies relating to
? countries in which investments can be made ? quantum of funds that can be invested
? geographical limits ? sectoral limits ? individual company limits ? types of investible financial instruments
? equity, preference, fixed-income securities ? convertible instruments, bonds with warrants ? currency specifications
? Modes of investment
?
Policies relating to (contd.)
? ? ? ? ? ? limit on periods for investments types of investee organisations repatriation of capital / principal inward remittance of corporate action benefits further investment in rights / bonus taxation policies
? ?
Relationship with other countries Domestic country’s
? ? ? ? current economic conditions current capital market conditions balance of payment position foreign exchange reserve position
? (eg) In early 1990s, India’s Balance of Payments position was precarious and forex reserves were at the lowest. Reforms in capital markets and other areas were initiated around this time
?
At different points of time, different countries or regions are in favour
? reflection of
? economic conditions ? industrial climate ? Government policies
? (eg) After Lehman collapse and following global credit crisis, no demand for bonds and interest rates went up. In the last quarter of 2009, Indian papers were again in demand and rates came down to even LIBOR + 250 bps ? (eg) In 2004, investors shifted from over-exposure to Taiwanese papers to Indian FCCBs ? (eg) India and China are favoured destinations today back
?
At different times, different financial instruments or different markets are favoured
?
? ?
(eg) shift from Luxembourg Stock Exchange to NYSE and NASDAQ
? Primary reason : IT companies in India wanted exposure to U.S. markets
(eg) shift from American markets to LSE (AIM)
?
primary reason : AIM offered less stringent regulations
(eg) demand for FCCBs of Indian companies
? ? high demand during 2004 to 2006 when markets fell (2008-09), no inclination to convert to equity demand for FCCBs revived after September, 2009
? ? FCCBs were bought back at huge discounts during 2009 some FCCBs are swapped for new bonds with later maturities and lower yields ? nearly USD 15 billion worth issued, maturing in 2009-11
?
?
(eg) demand for ADRs / GDRs of Indian companies
? ? demand was high till 2007 and then dropped in 2008 demand is reviving in 2009
? TATAs and Vedanta Group have raised large amounts in mid-2009
back
?
?
In general, funds sourced in international markets is expected to lower the overall cost of capital for companies from illiquid and/or segmented capital market regions Primary reasons
? Sourcing of funds from illiquid markets is generally costlier than funds from liquid markets ? Using the CAPM model for cost of equity, the risk premium and expected rate of return are based on international markets and not local markets
? Risk premium in local markets is higher than that in international markets
?
Interest rate at which a corporate can raise funds
? after-tax interest rate is usually considered ? after-tax interest rate = interest rate X (1-tax rate)
Examples of Funding from Abroad through Financial Instruments
?
Funds from abroad may come in following forms
? Foreign Direct Investment ? Portfolio Investment ? Venture Capital Investment
?
Funds may be from
?
Funds from abroad may be on
? Repatriable basis ? Non-repatriable basis
? (usually from NRIs and PIOs)
? FIIs, NRIs, PIOs, Venture Capital Funds, Other Corporates ? No investments from citizens of / corporates from Pakistan
?
Restrictions in investment in specific sectors
?
No investments from abroad in the following sectors
? Agricultural or Plantation Activities ? Real Estate Business
? in SSIs - Maximum amount of FDI – X% (24%) of SSI’s paidup capital ? in Infrastructure companies – maximum amount of FDI – X% (26%) of paid-up capital ? in Public Sector Banks – maximum amount of FDI – X% (20%) of paid-up capital ? in retail trading – no FDI
?
Type of instruments that can be used to raise funds from abroad
? Equity shares, Preference Shares, Debentures
?
Pricing of equity issues for foreign investors
? for listed companies in accordance with guidelines specified from time to time by SEBI ? for unlisted companies in accordance with valuation done by a Chartered Accountant
Examples of Funding from Abroad through ECBs
? ? ? ?
?
? ?
International Banks International Capital Markets Multilateral Financial Institutions (IFC, ADB etc.) Export Credit Agencies Suppliers of Equipment Foreign Collaborators Foreign Equity Holders
?
All-in-cost maximum limit
? n (6) month LIBOR + X (500) BPS ? This restriction is relaxed, depending on market conditions
? (eg) between January and June 2009, there was no restriction on the rate
?
End-uses allowed
?
End-uses not allowed
? Import of Capital Goods ? For on-lending to borrowers by NBFCs ? For investments in JVs abroad or Wholly owned subsidiaries abroad
? Working capital ? Investment in capital markets ? Repayment of existing rupee loans
?
FDI involved projects divided into 4 categories
? ? ? ? ? ? ? ? ? Projects Projects Projects Projects that that that that are are are are encouraged permitted restricted and prohibited
?
FDI is encouraged for
Agriculture Transportation Energy Basic industries Technology oriented industries
?
FDI may take the form of
? Mergers & Acquisitions ? Representative Offices in China ? Wholly owned foreign enterprises i.e. no local participation ? Foreign invested commercial enterprises
? ?
Generally FDI is welcome Some sectors subject to restrictions
?
Certain types of investments that may compromise national security are also subject to reporting and scrutiny
? (eg) U.S. blocked acquisition of an oil company in U.S.A. by a Chinese oil company in 2005 (acquisition of Unocal by CNOOC)
? Shipping, Communications, nuclear and other power generation facilities, exploitation of certain natural resources and aviation. Agricultural sectors is also restricted in certain states
back
Examples of Investment in Foreign Countries
?
Forms
?
Limits
? Joint Ventures (JV) ? Wholly Owned Subsidiaries (WOS) ? Portfolio Investments ? X% (400%) of the networth of investing company ? USD N mn (100 mn) ? Portfolio investment limit : X% (50%) of networth of investing company
? ? ? ? ? ? ?
ADRs / GDRs issued for funding investments Borrowing through ECBs or FCCBs Market purchase of foreign exchange Loans from banks in India Capitalisation of exports Share swaps Use of SPVs
? Not many acquisitions using this route ? Quite a popular route particularly in LBOs ? Not a policy but a practice
? ?
Outbound FDI actively encouraged Outbound FDI not only in developing countries but also in developed countries
back
10.00%
0.00% Japan Switzerland U.S.A Canada England Hongkong 0.50% 0.50% 0.25% 0.25% 0.25% 0.10%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
Europen Union 1%
2% 2.50% Korea New Zealand Australia India China Hungary Brazil
3.75% 4.75% 5.31% 6.25% 8.75%
Current Interest Rates
Current Interest Rates
?
Usually linked to a base rate or index
? (eg) 3 months LIBOR + 300 bps
?
LIBOR rates as on 1/9/09
USD s/n-o/n 1w 2w 1m 2m 3m 4m 5m 6m 7m 8m 9m 10m 11m 12m 0.22938 0.25125 0.25438 0.25625 0.27438 0.33438 0.49625 0.64125 0.72875 0.84063 0.94000 1.03750 1.12000 1.20563 1.29688
? ?
Public Sector Banks : Around 12% Private Banks : Around 15%
?
For companies with AAA rating :
? Around 400 to 500 bps above LIBOR ? 1 year LIBOR is around 1.30% ? ECB rate is around 5.30% to 6.30%
? ? ?
(eg) India based REI Agro raised USD 105 million thro’ FCCBs in November, 2009 at 5.5% p.a. (eg) IDBI Bank was expected to raise USD 225 mn at LIBOR + 235 bps in November, 2009 (eg) in 2005, FCCB rates were in the range of 1 to 1.5% p.a. – even YTM was only around 7% (taking into account premium on redemption of bonds, if not converted)
? FCCB rates are lower than other bonds / loans because of convertibility option
?
Nominal interest +/Appreciation or Depreciation of lender’s currency, if any
? (eg) Borrowing in USD @ 4% ? Borrowing in April, 2008 when USD was at Rs. 40 ? Repayment in April, 2009 when USD was at Rs. 50
USD vs INR
back
? ? ? ? ? ? ? ? ? ? ? ? ?
Australia Brazil China France Germany Hongkong India Israel Japan Mexico Singapore Switzerland U.K.
?
?
? ? ?
?
?
Dr. Reddy’s Labs HDFC Bank ICICI Bank Infosys Mahanagar Telephone Nigam Patni Computer Systems Rediff.com India
?
?
? ? ?
? ?
Satyam Computers Satyam Infoway Sterlite Industries Tata Motors Tata communications WIPRO WNS Holdings back
?
Internal resources
?
Accumulated profits
?
Borrowings
? ?
?
? ?
Sale of subsidiaries / assets Utilisation of export proceeds
?
Hindalco’s acquisition of Novelis was partly funded by internal accruals
Loans from local banks and financial institutions Loans from foreign sources Bridge loans from local or foreign sources Issue of bonds Locally or abroad
Hindalco’s acquisition of Novelis was partly funded by borrowings
? ? ?
Issue of equity
?
? ?
Stock swaps Leveraged Buy-outs (LBOs)
?
(eg) Tata Tea’s acquisition of British Tetley in 2000 and Tata Steel’s acquisition of Corus in 2007
?
Which currency to use ?
? Home currency, target country’s currency another currency like USD, Euro, GBP ? Will currency fluctuations between finalisation of deal and execution of deal affect cost of acquisition ? ? Can currency fluctuations influence timing of purchase ?
? (eg) in July, 2008 the takeover consideration of AnheuserBusch, an American company, by In-Bev, a Belgian-Brazilian company was influenced by the USD-EURO rates
? ? ? ? ?
Let’s take a hypothetical case Company X of India negotiated to buy Company Y in U.S.A. Price was fixed at USD 10,000 After fixing the price, before payment, USD depreciated against INR Now, Company X will have to pay a lower amount than what it would have paid earlier But, if the funding came out of borrowings in U.S.A. in USD, then it will not help the Indian company So, exchange rates also have a role in M & A cost back
? (eg) earlier it would have paid Rs. 45 X 10,000 ? now it has to pay only Rs. 40 X 10,000
? ?
? ?
Use of borrowed funds for acquiring a company Primarily used by a private equity firm
? To acquire a public company
? The public company becomes private ? The company is restructured ? Later the private company goes in for an IPO
? The private equity firm uses the assets of the target company as security for the borrowing ? The private equity firm uses the future cash flows of the target company for servicing the debt (dividend flows from target company) ? The debt is without recourse to the private equity firm
?
When management and employees of a company use borrowed funds to save a company from liquidation, it takes a form similar to LBO (known as Management buy out or MBO)
?
Example of TATA Tea acquisition of Tetley of U.K.
? Tate Tea set up a subsidiary in U.K. with around GBP 70 mn ? The SPV borrowed GBP 235 mn (3.36 times its capital of GBP 70 mn)
? This subsidiary was used as a SPV for the acquisition ? The Tetley acquisition price was GBP 271 mn ? Legal and other costs amounted to GBP 9 mn. ? Working capital requirements came to GBP 25 mn.
?
?
?
The borrowing was on the strength of Tetley brand and assets The entire debt was to be serviced out of Tetley’s operations Why LBO ?
? One reason is limitation on OFDI – not more than x% of networth of acquirer back
? ? ?
Most popular practices LBO route / SPVs in target countries / SPVs in tax havens Cash transaction
? Cash generated from internal accruals ? Cash generated from borrowings
? Overseas sources : ECBs, FCCBs
? Borrowings from Indian sources / overseas sources
?
Though other practices are allowed, not much utilised
?
Stock Swaps is a popular practice with other countries
? India does not resort to stock swaps much because
? Indian promoters not willing to dilute control ? Cost of equity being higher than cost of debt, Indian acquirers to borrow and pay cash rather than go for a stock swap ? Overseas sellers of target company are of the opinion that Indian companies are not managed professionally ? Also, Capital markets in India and markets for Indian shares overseas not as liquid and developed as investors wish ? Also, foreign investors do not understand Indian regulations and markets so well as do FIIs or other funds such as hedge funds or private equity funds ? Also, sellers are not sure of the valuations of the Indian company back
?
?
? ? ? ?
?
?
Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982 million. Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million. Dr. Reddy's Labs acquired Betapharm through a deal worth of $597 million. Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million. Suzlon Energy acquired Hansen Group through a deal of $565 million. The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million. HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500 million. VSNL acquired Teleglobe through a deal of $239 million.
doc_470695828.pptx
This is a PPT that includes topics like sources of funds,forex considerations,government policies,perceptions of investors,market trends,CAPM,ECB,ADR,FCCB,LBO,M&A deals
?
Source of funds / avenues for investment
? Identifying the right sources of funds
? plethora of options (country, method, nature)
? Identifying the right avenues for investment
? many options (geography, form)
?
Conversion of foreign currency to INR or conversion of INR to foreign currency
? Managing attendant exchange rate risks
? ?
Source of Funds Country Equity / debt
? Debt
? Loans / bonds ? Fixed rate / floating rate / zero coupon ? Convertible / nonconvertible ? With or without embedded options ? Listing exchange
Avenues for Investment ? Country ? Equity / debt
? Equity ? Debt
? 100% or lower percentage ? JV ?
? Listed / unlisted
? Public / private placements
? Listed / unlisted ? Cash deal or otherwise
? Loans / bonds ? Fixed / floating rate / zero coupon ? Convertible / nonconvertible ? With or without embedded options
?
Both funds raised abroad and funds invested abroad give rise to exchange rate risks
? These risks need to be managed
USD vs INR
?
Funds raised abroad have attendant exchange rate risks while repaying principal or paying corporate action benefits Funds invested abroad have attendant exchange rate risks while divesting or receiving corporate action benefits
?
?
To avail of
? alternate sources of funds for domestic use
? lower cost of funds
?
To utilise foreign funds directly
?
To
? ? ? ?
for for for for
import of assets acquisitions abroad greenfield projects abroad investments in assets abroad
? enhance prestige of companies ? create confidence amongst investors
? ? ? ?
? satisfy demand among foreign investors ? improve valuations
Stringent listing guidelines Stringent initial and continuous disclosure norms Stringent corporate governance norms Stringent accounting norms
?
Use of foreign currency and consequent risk of exchange rate fluctuation
? One has to convert foreign currency to local currency to use the funds raised abroad
? One can, ofcourse, directly use foreign currency abroad for investments, acquisitions or other purposes
? One has to ‘buy’ foreign currency (convert local currency to foreign currency) for repayment of funds sourced abroad and for payment of corporate benefits
? ? ? ? ?
Domestic Country’s Government Policies Foreign Country’s Government Policies Perceptions of Investors and Market Trends and Practices Cost Considerations
? ? ? ? ? ? ?
Corporates Banks and other Financial Institutions High Networth Individual Investors Retail Investors Private Equity Hedge Funds Pension Funds
?
Equity
? Depository Receipts
? GDRs and ADRs
?
Debt
? Bonds ? Money Market Instruments ? Other forms of Borrowings
?
Normally equity issued as Depository receipts (DRs)
? Global Depository Receipts (GDRs) ? American Depository Receipts (ADRs) ? Indian Depository Receipts (IDRs)
? ? ? ?
1 DR = 1 or < 1 or > 1 equity share of issuer DRs may or may not be listed DRs may or may not have voting rights DRs may be issued by the company that has issued the underlying equity or some other agency
? Sponsored DRs ? Unsponsored DRs ADRs
? ? ? ? ?
Bonds may be denominated in local currency or foreign currency Bonds may or may not be listed Bonds may have embedded options Bonds may be offered with warrants Bonds may be convertible or partially convertible
? Callable or Puttable bonds
? Bonds are generally OTC traded
?
?
?
Commercial Paper (CP) may be denominated in local currency or foreign currency CPs are usually negotiable in the OTC markets Banks and institutional investors invest in CPs
? ?
Public Offers Private Placements
?
Corporates may be allowed to use funds raised abroad in the same foreign country for various purposes
?
?
May be required to remit funds to home country immediately or within specified number of days May be allowed to retain funds abroad for future use
?
Restrictions may be present on repatriating capital and/or remitting dividends and interest
? Time ? Quantum ? Mode
?
Use of derivatives
? ? ? ?
100% Acquisitions of corporates Creation of wholly owned subsidiaries Joint ventures Portfolio investments
? ?
Why do corporates resort to overseas acquisitions ? Pertinent Aspects
? Various strategic reasons ? Regulatory regime ? Investment channels ? Funding options
? Regulations of both Governments
? Direct or through subsidiaries/associates in home country or foreign country or tax havens
? Internal resources, borrowings from home or foreign country, equity from home or foreign country, stock swaps, LBOs
? Currency considerations impacting cost of acquisition
? ?
Already discussed earlier Some examples
? ? ?
Direct by acquiring company Through subsidiaries / associates in home country Through subsidiaries / associates in foreign country Through subsidiaries / associates in tax havens
? (eg) TVS Motors set up a company in Indonesia through its subsidiary in Singapore
?
? (eg) 2006 – Welspun India acquired British brand ‘Christy’ – a subsidiary in Cyprus, a tax haven, was created for the acquisition back
?
Policies relating to
? countries from which funds can be raised ? quantum of funds that can be raised
? geographical limits ? sectoral limits ? individual company limits ? types of financial instruments that can be used
? equity, preference, fixed-income securities ? convertible instruments, bonds with warrants ? currency specifications
? mode of raising funds
?
Policies relating to (contd.)
? ? ? ? ? ? ? limit on periods for which funds can be raised types of investors from whom funds can be raised repatriation of capital / principal remittance of corporate action benefits further investment in rights / bonus voting rights of investors in case of equity witholding tax on corporate benefits
?
Policies relating to
? countries in which investments can be made ? quantum of funds that can be invested
? geographical limits ? sectoral limits ? individual company limits ? types of investible financial instruments
? equity, preference, fixed-income securities ? convertible instruments, bonds with warrants ? currency specifications
? Modes of investment
?
Policies relating to (contd.)
? ? ? ? ? ? limit on periods for investments types of investee organisations repatriation of capital / principal inward remittance of corporate action benefits further investment in rights / bonus taxation policies
? ?
Relationship with other countries Domestic country’s
? ? ? ? current economic conditions current capital market conditions balance of payment position foreign exchange reserve position
? (eg) In early 1990s, India’s Balance of Payments position was precarious and forex reserves were at the lowest. Reforms in capital markets and other areas were initiated around this time
?
At different points of time, different countries or regions are in favour
? reflection of
? economic conditions ? industrial climate ? Government policies
? (eg) After Lehman collapse and following global credit crisis, no demand for bonds and interest rates went up. In the last quarter of 2009, Indian papers were again in demand and rates came down to even LIBOR + 250 bps ? (eg) In 2004, investors shifted from over-exposure to Taiwanese papers to Indian FCCBs ? (eg) India and China are favoured destinations today back
?
At different times, different financial instruments or different markets are favoured
?
? ?
(eg) shift from Luxembourg Stock Exchange to NYSE and NASDAQ
? Primary reason : IT companies in India wanted exposure to U.S. markets
(eg) shift from American markets to LSE (AIM)
?
primary reason : AIM offered less stringent regulations
(eg) demand for FCCBs of Indian companies
? ? high demand during 2004 to 2006 when markets fell (2008-09), no inclination to convert to equity demand for FCCBs revived after September, 2009
? ? FCCBs were bought back at huge discounts during 2009 some FCCBs are swapped for new bonds with later maturities and lower yields ? nearly USD 15 billion worth issued, maturing in 2009-11
?
?
(eg) demand for ADRs / GDRs of Indian companies
? ? demand was high till 2007 and then dropped in 2008 demand is reviving in 2009
? TATAs and Vedanta Group have raised large amounts in mid-2009
back
?
?
In general, funds sourced in international markets is expected to lower the overall cost of capital for companies from illiquid and/or segmented capital market regions Primary reasons
? Sourcing of funds from illiquid markets is generally costlier than funds from liquid markets ? Using the CAPM model for cost of equity, the risk premium and expected rate of return are based on international markets and not local markets
? Risk premium in local markets is higher than that in international markets
?
Interest rate at which a corporate can raise funds
? after-tax interest rate is usually considered ? after-tax interest rate = interest rate X (1-tax rate)
Examples of Funding from Abroad through Financial Instruments
?
Funds from abroad may come in following forms
? Foreign Direct Investment ? Portfolio Investment ? Venture Capital Investment
?
Funds may be from
?
Funds from abroad may be on
? Repatriable basis ? Non-repatriable basis
? (usually from NRIs and PIOs)
? FIIs, NRIs, PIOs, Venture Capital Funds, Other Corporates ? No investments from citizens of / corporates from Pakistan
?
Restrictions in investment in specific sectors
?
No investments from abroad in the following sectors
? Agricultural or Plantation Activities ? Real Estate Business
? in SSIs - Maximum amount of FDI – X% (24%) of SSI’s paidup capital ? in Infrastructure companies – maximum amount of FDI – X% (26%) of paid-up capital ? in Public Sector Banks – maximum amount of FDI – X% (20%) of paid-up capital ? in retail trading – no FDI
?
Type of instruments that can be used to raise funds from abroad
? Equity shares, Preference Shares, Debentures
?
Pricing of equity issues for foreign investors
? for listed companies in accordance with guidelines specified from time to time by SEBI ? for unlisted companies in accordance with valuation done by a Chartered Accountant
Examples of Funding from Abroad through ECBs
? ? ? ?
?
? ?
International Banks International Capital Markets Multilateral Financial Institutions (IFC, ADB etc.) Export Credit Agencies Suppliers of Equipment Foreign Collaborators Foreign Equity Holders
?
All-in-cost maximum limit
? n (6) month LIBOR + X (500) BPS ? This restriction is relaxed, depending on market conditions
? (eg) between January and June 2009, there was no restriction on the rate
?
End-uses allowed
?
End-uses not allowed
? Import of Capital Goods ? For on-lending to borrowers by NBFCs ? For investments in JVs abroad or Wholly owned subsidiaries abroad
? Working capital ? Investment in capital markets ? Repayment of existing rupee loans
?
FDI involved projects divided into 4 categories
? ? ? ? ? ? ? ? ? Projects Projects Projects Projects that that that that are are are are encouraged permitted restricted and prohibited
?
FDI is encouraged for
Agriculture Transportation Energy Basic industries Technology oriented industries
?
FDI may take the form of
? Mergers & Acquisitions ? Representative Offices in China ? Wholly owned foreign enterprises i.e. no local participation ? Foreign invested commercial enterprises
? ?
Generally FDI is welcome Some sectors subject to restrictions
?
Certain types of investments that may compromise national security are also subject to reporting and scrutiny
? (eg) U.S. blocked acquisition of an oil company in U.S.A. by a Chinese oil company in 2005 (acquisition of Unocal by CNOOC)
? Shipping, Communications, nuclear and other power generation facilities, exploitation of certain natural resources and aviation. Agricultural sectors is also restricted in certain states
back
Examples of Investment in Foreign Countries
?
Forms
?
Limits
? Joint Ventures (JV) ? Wholly Owned Subsidiaries (WOS) ? Portfolio Investments ? X% (400%) of the networth of investing company ? USD N mn (100 mn) ? Portfolio investment limit : X% (50%) of networth of investing company
? ? ? ? ? ? ?
ADRs / GDRs issued for funding investments Borrowing through ECBs or FCCBs Market purchase of foreign exchange Loans from banks in India Capitalisation of exports Share swaps Use of SPVs
? Not many acquisitions using this route ? Quite a popular route particularly in LBOs ? Not a policy but a practice
? ?
Outbound FDI actively encouraged Outbound FDI not only in developing countries but also in developed countries
back
10.00%
0.00% Japan Switzerland U.S.A Canada England Hongkong 0.50% 0.50% 0.25% 0.25% 0.25% 0.10%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
Europen Union 1%
2% 2.50% Korea New Zealand Australia India China Hungary Brazil
3.75% 4.75% 5.31% 6.25% 8.75%
Current Interest Rates
Current Interest Rates
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Usually linked to a base rate or index
? (eg) 3 months LIBOR + 300 bps
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LIBOR rates as on 1/9/09
USD s/n-o/n 1w 2w 1m 2m 3m 4m 5m 6m 7m 8m 9m 10m 11m 12m 0.22938 0.25125 0.25438 0.25625 0.27438 0.33438 0.49625 0.64125 0.72875 0.84063 0.94000 1.03750 1.12000 1.20563 1.29688
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Public Sector Banks : Around 12% Private Banks : Around 15%
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For companies with AAA rating :
? Around 400 to 500 bps above LIBOR ? 1 year LIBOR is around 1.30% ? ECB rate is around 5.30% to 6.30%
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(eg) India based REI Agro raised USD 105 million thro’ FCCBs in November, 2009 at 5.5% p.a. (eg) IDBI Bank was expected to raise USD 225 mn at LIBOR + 235 bps in November, 2009 (eg) in 2005, FCCB rates were in the range of 1 to 1.5% p.a. – even YTM was only around 7% (taking into account premium on redemption of bonds, if not converted)
? FCCB rates are lower than other bonds / loans because of convertibility option
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Nominal interest +/Appreciation or Depreciation of lender’s currency, if any
? (eg) Borrowing in USD @ 4% ? Borrowing in April, 2008 when USD was at Rs. 40 ? Repayment in April, 2009 when USD was at Rs. 50
USD vs INR
back
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Australia Brazil China France Germany Hongkong India Israel Japan Mexico Singapore Switzerland U.K.
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Dr. Reddy’s Labs HDFC Bank ICICI Bank Infosys Mahanagar Telephone Nigam Patni Computer Systems Rediff.com India
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Satyam Computers Satyam Infoway Sterlite Industries Tata Motors Tata communications WIPRO WNS Holdings back
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Internal resources
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Accumulated profits
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Borrowings
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Sale of subsidiaries / assets Utilisation of export proceeds
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Hindalco’s acquisition of Novelis was partly funded by internal accruals
Loans from local banks and financial institutions Loans from foreign sources Bridge loans from local or foreign sources Issue of bonds Locally or abroad
Hindalco’s acquisition of Novelis was partly funded by borrowings
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Issue of equity
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Stock swaps Leveraged Buy-outs (LBOs)
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(eg) Tata Tea’s acquisition of British Tetley in 2000 and Tata Steel’s acquisition of Corus in 2007
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Which currency to use ?
? Home currency, target country’s currency another currency like USD, Euro, GBP ? Will currency fluctuations between finalisation of deal and execution of deal affect cost of acquisition ? ? Can currency fluctuations influence timing of purchase ?
? (eg) in July, 2008 the takeover consideration of AnheuserBusch, an American company, by In-Bev, a Belgian-Brazilian company was influenced by the USD-EURO rates
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Let’s take a hypothetical case Company X of India negotiated to buy Company Y in U.S.A. Price was fixed at USD 10,000 After fixing the price, before payment, USD depreciated against INR Now, Company X will have to pay a lower amount than what it would have paid earlier But, if the funding came out of borrowings in U.S.A. in USD, then it will not help the Indian company So, exchange rates also have a role in M & A cost back
? (eg) earlier it would have paid Rs. 45 X 10,000 ? now it has to pay only Rs. 40 X 10,000
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Use of borrowed funds for acquiring a company Primarily used by a private equity firm
? To acquire a public company
? The public company becomes private ? The company is restructured ? Later the private company goes in for an IPO
? The private equity firm uses the assets of the target company as security for the borrowing ? The private equity firm uses the future cash flows of the target company for servicing the debt (dividend flows from target company) ? The debt is without recourse to the private equity firm
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When management and employees of a company use borrowed funds to save a company from liquidation, it takes a form similar to LBO (known as Management buy out or MBO)
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Example of TATA Tea acquisition of Tetley of U.K.
? Tate Tea set up a subsidiary in U.K. with around GBP 70 mn ? The SPV borrowed GBP 235 mn (3.36 times its capital of GBP 70 mn)
? This subsidiary was used as a SPV for the acquisition ? The Tetley acquisition price was GBP 271 mn ? Legal and other costs amounted to GBP 9 mn. ? Working capital requirements came to GBP 25 mn.
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The borrowing was on the strength of Tetley brand and assets The entire debt was to be serviced out of Tetley’s operations Why LBO ?
? One reason is limitation on OFDI – not more than x% of networth of acquirer back
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Most popular practices LBO route / SPVs in target countries / SPVs in tax havens Cash transaction
? Cash generated from internal accruals ? Cash generated from borrowings
? Overseas sources : ECBs, FCCBs
? Borrowings from Indian sources / overseas sources
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Though other practices are allowed, not much utilised
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Stock Swaps is a popular practice with other countries
? India does not resort to stock swaps much because
? Indian promoters not willing to dilute control ? Cost of equity being higher than cost of debt, Indian acquirers to borrow and pay cash rather than go for a stock swap ? Overseas sellers of target company are of the opinion that Indian companies are not managed professionally ? Also, Capital markets in India and markets for Indian shares overseas not as liquid and developed as investors wish ? Also, foreign investors do not understand Indian regulations and markets so well as do FIIs or other funds such as hedge funds or private equity funds ? Also, sellers are not sure of the valuations of the Indian company back
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Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982 million. Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million. Dr. Reddy's Labs acquired Betapharm through a deal worth of $597 million. Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million. Suzlon Energy acquired Hansen Group through a deal of $565 million. The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million. HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500 million. VSNL acquired Teleglobe through a deal of $239 million.
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