Thursday, November 13, 2008
Until recently, only India’s own restrictions kept Indian firms from being listed on US markets. And now India has finally recognized the value of opening its doors. This permitted Indian companies to compete on global basis. Companies like Infosys, Satyam, Rediff and Wipro have formed the vanguard, opening the door for Indian companies to come to the US and tap into the capital markets.
It has been a long road getting those restrictions relaxed, and we have yet to reach our final destination. We’re still working with many different Indian agencies and regulatory bodies, including the Reserve Bank of India (RBI), the Securities Exchange Board of India (SEBI), the Ministry of Finance, and others. On the whole, India doesn’t require as many approvals as it used to.
Today, top-level Indian officials are really willing to listen. And they are making a sincere effort to change the way the country operates. However, at the lower levels there is less of a grasp of the process, and this introduces inefficiencies. For the change to be effective, all levels of government have to change. They still need the horsepower and perspective, and understanding to get the job done.
India also needs to get a lot more advice from people in the US. That’s been done recently with the formulation of several panels and commissions. We need more resources from the US to help the government formulate processes, requirements and statutes. For example, the RBI issued a statute under the new Foreign Exchange Management Act (FEMA) that allowed Indian companies to acquire US companies abroad without RBI approvals. However, the draft as written shows that no one understood how acquisitions work abroad. The intentions were right — the government wanted it to happen — but it just didn’t have the expertise.
Road Blocks To IPO
Even though an IPO on the Nasdaq or NYSE is a very achievable dream, an Indian company has to be outstanding to have a chance at going public in the US. Companies like Infosys and Wipro, which are very strong revenue-generators, give you an idea of what ventures have the best chance of success.
The whole process is simpler now. An Indian company that wants to do an IPO in the US can easily do so, provided it meets the same requirements as a US company. It must make the same disclosures, provide the same SEC reports, and follow all the same rules. It has to measure up to the other companies in the US. The dream is within their grasp. What is needed is forward thinking management, and ability and energy to scale to that limit.
Many new companies in India are growing with the IPO dream in mind. They have to focus on what they are doing on the road to the IPO. There have to be properly structured intermediate private financings. The management team must be fully rounded out and the organization has to be as transparent as possible. This is a key difference between old-world and new-world Indian companies. In the old world there was no telling what went on inside a company in India. This has to go, as achieved by the company that have already gone public.
Tangible Benefits of an IPO
The huge benefit, of course, is name recognition. Companies like Infosys and Wipro have derived enormous advantages from being listed in the US. A sense of standard is accomplished in the company when you’re listed on the Nasdaq or the NYSE. Customers believe you are just as good as any other US company. That is a plus for any company.
The second benefit is that you have a very substantial pool of dollars— an international currency— which you can access for your growth. The third is that you’ve now established a currency with which to make acquisitions outside of India. Without access to currency an aggressive acquisition strategy would not be possible.
However, a public company has some obligations. You have to meet certain reporting requirements. You have to report your financials under the US Generally Accepted Accounting Principles (GAAP), and this is slightly different from Indian requirements. This also opens you up for shareholder liability suits and stock market fluctuations. You must be accountable every day. Even though timing is a critical factor, the bottom line is that a strong business plan, strong revenue growth, and a competitive market position will allow you to leverage the US capital markets. As Indian companies get more US venture backing, they’ll get more of the input, advice and counseling needed to structure and prepare to go public.
The Larger Impact
An IPO will bring prosperity and economic growth to India as a whole, and not just for the individual companies. It’s a phenomenal wealth-creation tool. There is always a trickle down impact on the local economy. The company itself invests a lot of money in its local property development and its local employee benefits.
The IPO trend will continue, but there will be a definite drop-off once the more mature companies go public. Once the top 10 or 15 companies have already gone public, the next set of companies are really small, and will have a chance to go public in the US only if they perform well. Increasing influx of venture funds is also enabling companies to grow quickly enough to a global level.
Raj S. Judge is a corporate and securities attorney with leading law firm Wilson Sonsini Goodrich & Rosati.
