Hyundai’s IPO can internationalise India’s capital market

The pool of sound listed companies for domestic investors is not the only advantage if other MNCs list Indian arms. India can become a market of choice for firms from EMEs 

New Delhi, June 29, dmanewsdesk: Hyundai’s proposed public issue, with the Korean parent offering for sale 17.5% stake in the Indian subsidiary, throws up some novel opportunities. The money raised would go out of India to the Korean parent, and so the effect would be no different from if the Korean parent were to raise fresh capital for itself in India, rather than in London or New York.

Repatriation of the capital would take out a max of $3 billion from India, nothing to worry about, either in terms of the impact on India’s foreign exchange reserves or on the exchange rate. The potential benefits outweigh, by far, the potential harm.

It Adds to Good Options of Domestic Investors

The public issue would be a gain for the Indian investing public, who have been ratcheting up valuations in their investment universe of listed companies, comprising a limited number of investment-worthy companies, and of some dubious entities of the sort that simply insert AI in the company’s name and push WhatsApp messages to all and sundry expounding on the brave new world of artificial intelligence and the fortunes to be made by catching the wave early. Investors would get a chance to own a chunk of India’s second-largest car maker, with access to good research and development capabilities in its foreign parent.

Elements of the Indian stock market ecosystem — merchant banks, brokerages, corporate law firms, rating agencies, sundry analysts, investment pools — all will get additional business. That is a transparent plus.

Will There Be a Knock-On Effect?

The interesting question is, will a successful Hyundai IPO induce other multinational companies to list their Indian arms, taking advantage of the Indian market’s red-hot valuations? Will such capital raising add momentum to India’s capital account convertibility plans? Can India develop as a financial centre for companies from Asia and Africa, where the capital that is raised comes from foreign funds, as well as Indian investment pools, with India serving as a site for allocation of capital drawn from India and abroad? After all, this is what happens when a company offers shares and gets listed in London or New York.

Getting a Leg Up on China

India would, in the process, steal a march over China, whose own financial markets, including the market for equity capital, lag the country’s product markets in sophistication.

The Chinese economy is right now struggling to recover from the collapse of its property sector. Real estate served as the principal form of savings for the Chinese, even after the homeownership rate rose to nearly 90% by 2014, many owning a second or even a third home. The illusion that residential property is a form of saving that would not lose value cannot sustain when excess supply finally meets with its reckoning, in the financial travails of property companies that cannot repay loans or complete projects that they have already sold. Right now, the Chinese are saving in tiny gold beads, after the collapse of the property market and of giant property firms like Evergrande. Chinese savings are still waiting to be financialised, which is why American financial majors do not join the chorus of decoupling from China. They see huge business potential in this area.

India’s financial markets are relatively more evolved, except for the market for corporate debt. In the speed of settlement of trades, in guaranteeing settlement, in applying price floors and ceilings in times of extreme stock price volatility, in the number of stocks with individual futures and options, and in the digital underpinning of capital market transactions, India is right there at the global cutting edge. Unlike in the US, where the regulation of financial and commodity markets, as well as of spot and forward markets, is split up among different regulators, India has unified regulation, with government debt being an outlier.

Equities, a Preferred Choice

Indian investors have been weaned off bank fixed deposits and a policy from the Life Insurance Corporation of India as their preferred forms of financial savings. Investment in stocks, via mutual funds, equity linked saving schemes and direct purchase, have grown by leaps and bounds, to a stage where the market can shrug off coordinated exits by foreign portfolio investors.

Capital can flow in and out of India reasonably smoothly, and the International Financial Services Centre in GIFT City, Gujarat, makes the process even more frictionless.

All this offers an opportunity for India to serve as a global centre of financial intermediation. Earlier, multinational companies listed their Indian arms out of regulatory compulsion. Now, Hyundai’s share price rise in Korea, after its IPO proposal in India came to light, makes it clear that India would be an attractive place for raising capital for global companies.

Will this place an undue burden on India’s currency regime? That is unlikely, with foreign capital flowing in to take part in share offerings in India, along with participation by Indian investors. India’s capital account restrictions apply mostly to residents, not foreign investors. In the interest of extreme prudence, regulation can set limits on how much residents can invest in foreign share offerings. Right now, policy allows an individual resident to take out up to $250,000 for current or capital account purposes a year. The limit for an individual resident for participation in a foreign share offering in India could be fixed at, say, double that limit. While the resident would not be taking any capital out directly, her purchase of a foreign share offering would lead to an equivalent outflow by the issuing multinational.

On the plus side, the additional demand for dollars in the forex market for repatriating IPO proceeds by MNCs would spare the RBI the need to purchase inflows to prevent overvaluation of the rupee.

Once Hyundai tastes success, and other global companies with or without an Indian presence show an inclination to raise capital in India, the government should stand ready to welcome the move.

Source: money control