The heady concoction of vaulting valuations in conjunction with a democratised investor base with 170 million and growing accounts for holding electronic securities, nearly $700 billion of forex reserves, a steady domestic consumption story and the multi-fold gains that several freshly minted issuances have racked in is tantalizing enough for several global corporations to test the appetite for bigger initial public offerings.
Following Hyundai’s cue, LG Electronics India is waiting in the wings, so is Philips. Coca Cola too wants to pop open the crown of its bottling operations in India and go public. Frenzied bankers will roll out a list of a dozen more MNC names that are primed for or seriously evaluating the prospects to raise capital through Indian primary markets. US appliance maker Whirlpool has already opened the door – offering up to a quarter of its local operations – to equity investors here.
Commentators are comparing the South Korean automaker’s $3.3 billion IPO of its Indian arm to be a milestone akin to the trendsetting Colgate Palmolive Co’s listing of its local unit half a century back.
But a India listing is not for every single MNC. We remain a complex, highly regulated, expensive market with emotional investors and fast evolving guidelines. It is easy to get it but not that simple to get out. Look before you jump.
On the face of it, its welcoming to see good quality paper with global pedigree and with high governance enter the capital markets to counterbalance the frothy valuations of many of our home grown, family-owned businesses or even some dubious entrants who are piggybacking on the ongoing IPO juggernaut.On the face of it, it’s welcoming to see good quality paper with global pedigree and with high governance enter the capital markets to counterbalance the frothy valuations of the Indian listed company universe. Even though India’s biggest ever IPO slipped 6% on debut and spluttered to list at a discount on Tuesday, cheerleaders insist the FPI sell off this red October is more a blip. For much of much of this year, equity markets have been on fire and its unlikely the broad trend is poised for a sudden U turn. MSCI India has surged 18.64 so far this year, beating most major markets — MSCI Emerging Markets and MSCI World, which are up by 12% and 18% during this period. In total, the Indian benchmark has more than doubled since the end of 2019.Who then should follow the Korean Chaebol and drive straight into the stock market melee?
Only those global giants that have significant India businesses that contribute a significant sum to the global topline and has a brand with significant connect like a Hyundai or even an LG. Size does matter. As do decentralised decision making. For the first nine months of 2024, Hyundai India shares of global sales reached 15% — a record high. LG India retains its leader board position, its products and brand is recognised instantaneously in this country while Hindustan Unilever that was listed way back in 1956 – the first foreign subsidiary of the Anglo Dutch bell weather to offer 10% of its equity to the Indian public – remains the largest subsidiary when it comes to sales volumes of its shampoos, soaps and detergents. It is also the 2nd biggest after the US in revenue. But try and list fringe operations to raise money at lofty valuations, it will backfire. The pain of the process, regulatory scrutiny, far outweighs the gains. A strong India angle is the biggest marker to make it to the primary markets.
Investors are always bullish on value unlocking stories. The valuation arbitrage between India and the parent makes a compelling proposition to list in India. Uber-rich multiples make it cheaper here to dilute equity. Smart institutional money will also double down to buy into this growth story by recalibrating their global portfolios. It is a win-win for both investors and the issuer. Ever since Hyundai’s plans to list became public, the parent’s stock appreciated, YTD it is up 40%.
It also becomes a currency that helps in large ticket future M&As if decisions of Schneider or HUL are anything to go by. These companies paid top dollars for assets in India like GSK’s consumer business or L&T’s switchgear business and even convinced their global boards to wait for two years to play out a regulatory stalemate primarily on account of the premium valuations their listed local arms have always enjoyed.
On the flipside though, Indian stock markets still thrive on sentiments and emotions much more than many of their peers across developed economies which are far more reliant on interest rates and other financial markers. Optics and perceptions impact more here than hard business realities.
The constant negative chatter across multiple forums about Hyundai upstreaming Rs 10,782.42 crore to its parent days ahead of its India market debut did unnerve retail investors resulting in muted participation. Reducing excess cash to lower the total equity capital from unnecessarily high levels, especially if it’s not needed in the business is actually beneficial to stop the drag on returns (ROE), but Hyundai’s timing was perceived to be off. Even the sale structure – a 100% secondary sale of shares or offer for sale (OFS) by the parent since Hyundai Motor Co was selling 17.5% stake in the wholly owned Hyundai Motor India – surprisingly rekindled the old debate among several; “open minded” mandarins and ex-regulators over allowing MNCs to immediately repatriate capital back to HQ without ploughing it back into the local operations.
Robust market economics should encourage free movement of capital and talent. After investing billions in a country over many years, if an MNC wants to upstream some cash to fund global capex or reduce leverage or buy back shares or even pay dividend to the parent’s shareholders, it is no crime. Yet in India it is still scowled upon by many who most often blur the line between private equity and strategic foreign capital. But still people often misread the intentions of short term PE investors versus strategic foreign capital.
There are other bigger issues at play as well, largely around related party transactions (RPT). In India, where family businesses account for 3/4th of GDP and opaque dealings have ensured only a handful generate shareholder value, listing rules makes it mandatory for every single such decision to be vetted by audit committees. Material trades above a certain threshold also need additional shareholder approvals and regularly disclosed. This is necessary in India but can prove to be tedious for global companies that operate here, post listing.
In comparison, UK and US, where boards manage professionally run companies, the regimes are more liberal. UK is most flexible while US rules are a half way house between the two. This is also true about board compositions. Our rule book stipulates the number of women directors, half the board should be non-executive in nature with extra safeguards depending on the chairman’s role or if any relatives or promoters join the apex board or a CXO position. UK Governance Code just recommends while the requisite law only seeks an equal mix of independent, non-executives and executive members to avoid dominance of an individual or a group.
Where RPTs have hurt the MNCs most are royalty payouts. It’s forever a thorny subject for Indian shareholders and has pricked several blue blooded names — HUL to Holcim, Maruti Suzuki to the recent case of Nestle. Efforts by HQs to periodically seek higher royalty from its local outpost is always seen as a colonial lagaan. In retaliation, local investors have always beaten the price of the local stock down even when the management have valiantly tried to defend such moves, arguing they get value in return – R&D and innovation, brand and shared services support that help to growth the local subsidiaries.
More importantly, to get things moving, listed MNCs in India, need to get such decisions cleared through extraordinary resolutions that need majority of minority shareholder approval and are therefore far more challenging in nature. Both royalty and dividend upstreaming need to get passed by a simple majority in the US.
Equally onerous are delisting norms in India. MNCs should consider listing a permanent decision. In most developed markets, take private is a market driven decision. Our regulations are far more strident with defined thresholds that always makes it an expensive and exhausting exercise to delist. Linde, Vedanta, Hexaware have all tripped up. Much bigger companies too experimented but have always backtracked. It’s fair to say, if companies want the capital of Indians today, they should be prepared to pay fair price to them tomorrow, but till a fortnight back, delisting via reverse book building process ensured corporations pay out 70-75% premium to current market prices to be able to successfully tip over the line. The new regulations remain untested.
Finally, the argument that local listing helps in incentivizing local talent towards wealth creation should be a two-way street. If owning a listed stock in the local Indian subsidiary operating in a high growth market is considered a lucrative bet than the chump changes that global ESOP programmes generate, then it should also be held true when an IPO is priced. If one takes away the last dime from the table – much like what Hyundai while trying to price to perfection and leave nothing for the retail shareholder looking for the listing day pop, then be ready to face their ire or taste the thunder.