Tighter rules on overseas fund raising are welcome
The decision to impose serious restraints on firms raising funds abroad and ensure regulatory parity with domestic rules is welcome, if long overdue. Strict disclosure rules in the Indian market, with profitability requirements and the need for corporate track-record had created an opportunity for regulatory arbitrage. It allowed firms to skirt local rules and raise funds abroad with minimal disclosures. This was through Global Depository Receipts (GDRs) listed on bourses based in international tax havens or by way of Foreign Currency Convertible Bonds (FCCB).
The quality of firms raising FCCBs has long raised the suspicion that Indian industrialists were round-tripping unaccounted wealth by laundering it through FCCB subscriptions. Even firms barred from tapping the domestic market evaded punish- ment and took advantage of the bull run by raising foreign funds. The government has done well to nix several loopholes at one stroke and indirectly enlarge the Securities and Exchange Board of India’s (Sebi’s) regulatory jurisdiction to cover all fresh issues of capital in India or abroad.
Sebi’s advisory panels had ex-pressed disquiet at its lack of authority over foreign issues. The quality of FCCB and GDR issues were especially flagged. While the FCCBs made a mockery of Sebi’s stringent domestic regulations for IPOs, GDRs were more worrisome as they are fungible and end up with domestic investors (with little disclosure) after conversion into local equity. The government did well to insist on local listing within a specified period, barring rogue firms from going abroad for funds and specifying a price band for such issues by linking these to the previous six months or two-week mean price. These will go a long way in cleaning the primary issue market and will prevent dubious issuers from giving Indian firms a bad name abroad.
In the next few weeks, the regulator will also have to clear pending guidelines for simultaneous issue of domestic and foreign equity. It will have to tread warily, given that Sebi has already declared its intention to ensure that continuous listing norms are strictly adhered to. Similar clarity on Videocon’s appeal and claim before the Securities Appellate Tribunal, that GDR and ADRs should be included in the description of public float, is also imperative. This is important to allay investors’ fears that issuers and foreign institutional investors (FIIs) may squeeze domestic floating stock, as they have greater control over their stock prices abroad, though it is contrary to the concept of free trading.