Identifying Opportunities ADR/GDR/FCCB

Overview of ADR / GDR & FCCB Issuance

GDR
A Global Depositary Receipt or GDR is a security issued by a Depository Bank, such as Bank of New York or Deutsche Bank, in place of the foreign shares (issued by an Indian issuer such as SBI/Reliance) held in trust by that bank, thereby facilitating the trading of those Indian shares in the form of GDRs by international investors, on global markets, such as London. "

Equity Options
ADR Issue Visibility is very high No lock-in for investors Threshold minimum size & float Stringent regulatory requirements (e.g. Sarbanes Oxley) High issuance costs

Foreign Relatively faster No lock-in for investors Flexibility to choose specific investors Relatively moderate cost Potential pricing discount

GDR Issue

GDR Issue Key Advantages

Parameter Time to completion Pricing Size of the issuance New Investors Lock-in stipulation Visibility for the Company Post Issue Volatility of Stock Price Restrictive Covenants Features
Accelerated GDR can be completed in 7 - 8 w eeks Close to the market price on the day of pricing the issuance, subject to SEBI floor Typically, in the region of US$ 40-250 mn Leading FIIs and global institutional investors can participate in quality GDR issuances SEBI lock-in does not apply to shares underlying the GDRs High visibility amongst the international investors Low due to presence of long only FIIs None

GDR Principal Characteristics

Parameter Documentation Form/Structure Settlement Accounts Listing Distribution Documentation Ongoing disclosure Follow-on fund raising Features
Euro style documentation under UK law (10b(5) legal opinion required) GDS represent the tradeable instrument created out of the GDR programme Via Euroclear in Europe through scripless book entry system and via DTC in USA Prepared according to Indian Accounting Standards, though investors prefer to see reformatted accounts London or Luxembourg International institutions under Reg S and Rule 144A of US Securities, 1933 International standard but less onerous than the SEC - fully acceptable to international investors In line with home market requirements. However new Transparency Obligations Directives of EU are expected shortly There have been a number of successful GDR follow on issues

Time Table
Illustrative timetable of an offering
Offering document Kickoff meeting (incl. legal counsel, accountants) Receipt of accounts Draft prospectus (including due diligence) Submit first draft to Luxembourg/London Exchange Receive & reply to Luxembourg/London comments Finalize and file the red File the final document with Luxembourg/London Stock Exchange Discuss and finalize Underwriting agreement Discuss and finalize Lock up agreement Discuss and finalize Deposit agreement Sign the underwriting agreement Receive signed lock up agreement Sign the deposit agreement Management briefings to analysts Preparation and distribution of research Black out period Discussion on various marketing issues Conference calls/ roadshow with potential investors Launch and bookbuilding Pricing ** Finalize allocation to investors ** Bring down due diligence ** Closing, settlement, listing and start of official trading Week Starting Wk 1 Wk 2 Wk 3 Wk 4 Wk 5 Wk 6 Wk 7 WK 8

Month 1

Month 2

* Typically within 2 to 3 working days of Pricing

Marketing & Launch

Agreements

Typical Cost Structure Based on an assumed issue size of around US$ 75 - 150 million,
set out below is an estimate of the expenses* other than Underwriting Commissions for the listing of the Companys GDR :
US$
International Legal Counsel Domestic Legal Counsel Accountants Roadshow Expenses Printing fee Total 325,000 30,000 80,000 40,000 15,000 490,000 -

US$
425,000 50,000 120,000 50,000 20,000 665,000

* Note that the above fees represent our best estimates and actual fee would be based on quotations received. In addition, there would be costs associated with travel, communication etc.

Marketing Process There are a number of stages to building international

recognition and momentum in the build-up to the Companys Road-show & Pricing & GDR listing: Education Preparation Launch Book-building Aftermarket
u Develop investment thesis u Syndicate Selection and structure u Offering structure u Research publication u Sales force teach-in u Investor premarketing u Feedback from pre-marketing u Road-show rehearsal u Publish preliminary prospectus u Targeted Roadshows u Daily Updates u Book building u Quality Allocation u Aftermarket trading support u Ongoing research coverage u Post Offering Support

Marketing Strategies: Pre-marketing

Research Analyst
Pre-marketing

of pre-marketing: To get feedback from the potential investors on the company, pricing and investor appetite preliminary marketing initiatives & approach the core investors with definite time table and offering size valuation/price range with investors prior to the launch of the transaction, but will refine the discount range as the book-building process continues
Target Launch

Objective

4-5 days

Foreign Currency Convertible Bonds (FCCBs)

FCCBs are a type of convertible bonds issued in a currency different than the issuer's domestic currency. Main features FCCBs have to compulsorily denominated in any foreign currency (usually they are USD denominated) The Investors have the option to convert these bonds into equity shares/GDRs of the issuing Company after a stipulated time period at a price determined at the time of issuing FCCBs The conversion price is at a premium over the current stock price, or is set by a formula based on the price at the time of redemption. The issuer may some times have a call option, generally with a call hurdle, i e subject to a minimum stock price at the time of call which means, invariably at the exercise of call, the investors would opt for conversion into equity.

FCCBs
The

convertibility of the bond is akin to a put option to the bondholder, as

he can redeem the bond while opting for conversion.

As an investor in the equity, the bondholder has a call option i.e. he has the right to buy equity at the set price.

Till the time they are not converted into equity, they have all the regular features of a bond viz. coupon rate and redemption premium as the two streams of earnings

Advantages to the Issuer

Low coupon rate Staggered Dilution Delayed dilution of EPS An FCCB timeline is shorter than a domestic IPO or a syndicated loan No rating required Bonds need not be secured FCCB carries fewer covenants as compared to syndicated loans or debentures Minimum return assured along with an opportunity to share in the market upside

FCCB - An indicative Timeline

Days (T+) 4 8 12 16 20 24 28 32 36 40 45

Structuring and Agreement of the Terms Conduct Financial/Legal Due Diligence Draft Offering Circular Circulate Draft Subscription Agreement Comments and Review of the Offer Circular Comments on the Subscription Agreement Draft Legal Opinion & Auditors Comfort Letter Finalise Due Diligence Finalise Legal Opinions & Offering Circular Obtain In-principle Aproval of Stock Exchanges Obtain RBI Loan Registration Number Finalising the various documents Pricing of FCCBs and Signing of Documents Issue Payment Instructions Closing, payment and Issue of FCCBs

T = Kick Off Meeting