A problem for Chinese companies is turning out to be an opportunity for Indian ones. The recent controversy over accounting standards of Chinese firms listed in the US is forcing investor pools which traditionally invested in these, to capitalise on their high growth, to look at similar investment opportunities in India.
The Securities and Exchange Commission, the market regulator in America, is conducting a review of accounting problems in dozens of China-based companies after they began disclosing auditor resignations or book-keeping irregularities. For example, one of the ‘Big Four’ accounting firms resigned as auditor of a Chinese software company in May, saying it had found falsified financial records and bank balance confirmations.
Investment banks based in Singapore and the US, which had helped the Chinese companies list on Western exchanges, have begun to set up shop in India. “We have received at least six queries in the last couple of weeks from our investor base about good Indian stories,” said Jeffrey O Friedland, managing director, Friedland Global Capital. The US-based investment bank had primarily operated in China, helping at least nine companies list on the US and Canadian exchanges in recent years.
| CROUCHING TIGER, WOUNDED DRAGON |
| * Chinese companies out of favour in US/Canada |
| * I-bankers, out of job in China, coming to India |
| * Investor pools looking for firms free of accounting risks |
| * Exchanges keen to get Indian firms listed |
| * Opportunity for companies with $100-150 million |
Friedland said there is a huge India interest in his investor base, which comprises family groups, family offices and high net worth investors. The typical ticket size ranges between $500,000 and $2.5 million. These investors are looking at high growth in emerging market opportunities that are better than the near-zero interest rates back home and, at the same time, without governance issues. “China is out for them for at least 18 months now,” he added.
According to him, more bankers who are out of work in China are coming to India. “You may find one of them sitting in a nearby coffee shop and talking to a promoter. You never know.”
Indian merchant bankers which concentrate on mid-sized companies in tier-II and tier-III centres are keen to tap this. These companies are usually neglected by the bulge-bracket investment bankers.
Vicky Dhir, director, DM Capital Advisors, said they’d already identified a few family-owned companies for foreign listings. “We have met a few promoters, including one from an agri-products company and an electrical goods maker. These companies are in a transition phase, with the second-generation promoters who have returned with foreign education taking over, and are more open to international practices.”
Dhir is focusing on companies with an annual turnover of $100 mn. Many of these are in dire need of capital. “They have good growth. But funding, especially from banks, is difficult to come by. Though many have still not exhausted their ECB (external commercial borrowing) limits, banks are not giving them guarantee.”
Bankers say in such a situation, a foreign listing, which can raise up to $10-15 mn, will be a godsend for these companies. It also opens the possibility of future fund raising at higher valuations, they said.
India has been trying to get its own small companies market, the SME Exchange, up and running for several years but with little success. Many foreign stock exchanges are keen to fill this vacuum. In another first, the Frankfurt Stock Exchange recently held a road show in Mumbai to woo Indian companies to list on it. The exchange positioned itself as a prospective destination for Indian engineering firms.Friedland said exchanges such as Frankfurt, Toronto and the NYSE were the most likely destinations for Indian firms.“We are looking at taking companies to Canada first. This could make things easier, as it opens the way for dual listings in the US,” he added. Companies have to follow the holding company route, since direct listings in foreign bourses are not allowed under Indian laws.
More than a dozen Indian companies, many in the energy segment, are already listed on the London Stock Exchange’s Alternative Investment Market.
India is also a hot destination for investment bankers looking at mid-size merger deals. Last month, around 250 of them, from 40 countries, were in Mumbai at a first-of-its kind speed networking conference. Bankers and advisors from a number of European countries such as Germany, Spain and Britain met entrepreneurs and promoters of mid-sized Indian companies. S Vishvanathan, managing director of SBI Capital Markets, who helped put up the conference, said there is a lot of interest in the mid-sized deals space in India. “Whether it has gone up or down is difficult to say,” he added.
