The Companies Bill, 1997, proposes to allow corporates to issue "quasi-equity instruments with differential rights"--legal babble for non-voting shares, or shares that carry, say, 30 to 50 per cent of the voting rights associated with ordinary shares. Companies may also be allowed to convert voting shares into non-voting, or partially-voting, shares after obtaining shareholder permission. There is, however, a ceiling on the issue of such shares: the total quantum of shares with differential voting rights cannot exceed 25 per cent of the share capital with normal voting rights.

Why could non-voting shares become a standard ingredient of the financing pie for large projects? Promoters would often freeze expansion plans which required a step-up in the equity base simply because they could not cough up the personal resources to maintain their stake. Alternatively, the project would go on stream with bloated gearing ratios. Avers Aneish Kumar, 38, vice-president (leasing), Lloyds Finance: "With non-voting shares, the risk of dilution will no longer be a major constraint when embarking on mega-projects." Plus, debt-equity ratios will stay healthy.

A caveat: institutional investors, especially foreign institutional investors (FIIs), do not like non-voting shares. The suspicion still lurks that unscrupulous promoters could use them to cream off funds. Safeguards against such abuse include the stipulation of a minimum equity base and a track-record requirement, Also, if the company reneges on paying dividends for more than three years, non-voting shareholders will, automatically, be entitled to full voting rights. To make the trade-off between control and return more palatable to the investor, CFOs may have to offer a variety of sweeteners, such as put options which would give the investor the right to sell back the shares to the company at a pre-determined price.

DEPOSITORY RECEIPTS. The depository receipt is the offshore equivalent of the non-voting share. This is a dollar-denominated negotiable instrument that is issued against the shares of an Indian company. Typically, the Global Depository Receipt (GDR) will correspond to the shares in a fixed ratio, and the holder can convert it into the underlying shares at any time after an initial cooling-off period. Until conversion, however, the voting rights vest with the custodian. Of course, no sensible CFO will ignore the conversion calculation when launching a GDR issue, but do not forget that the extent of conversion will be limited by the 30 per cent cap on the investment by FIIs in any single company.

No wonder, then, that, since 1992, when access to the overseas equity markets was first permitted, Indian companies have been queuing up for such issues, pushing such offerings past the $2-billion mark by 1994-95. Although the boom was punctured the following year, GDR issues picked up in 1996-97, soaking up $1.35 billion.

This trickle could swell into a flood. Sure, the GDR market has tumbled with the free fall in the global equity markets. But do not expect this to be more than a temporary blip. Says Pradip Asrani, 45, director (corporate finance), bzw: "The demand for Indian paper is quite upbeat among the emerging market investors mainly because, in India, the demand for most products outstrips the supply." Adds Nicholas Butt, 39, head of investment banking, Jardine Fleming India: "At 14 to 15 times earnings, Indian equity is one of the cheapest buys among the emerging markets. Combine the low price-equity ratios with good growth prospects, and the potential for appreciation is large."

That potential should expand the global profile of Indian paper. Stringent disclosure norms, higher listing costs, and the preparation of accounts according to the US Generally Accepted Accounting Principles, which put dubious corporate governance practices under scrutiny, have kept Indian companies away from the lucrative American Depository Receipt (ADR) market. While GDRs trade on the London and Luxembourg exchanges, and are confined to institutional investors, adrs are listed on the New York Stock Exchange.

Even retail investors can then be included in the fold, providing the greater depth required for mega-issues. As disclosure standards improve, and Indian accounting standards are harmonised with global accounting standards, more companies will be able to cross these entry barriers. Already, after an abortive first attempt, BPL Cellular Holdings completed the first-ever ADR issue by an Indian company in May, 1997. And two more Indian corporates--the Rs 81.17-crore Bharti Telecom and the Rs 139-crore Infosys Technologies--are planning to follow suit.

For the CFO, what are the advantages of a depository receipts issue as opposed to a domestic public issue? First, better price discovery since GDR issues are marketed through the book-building route. Typically, the lead manager, or the book-runner, forms a syndicate which, in turn, fans out on a marketing run among institutional investors to build the order book. Based on both an in-house valuation of the issuing company's intrinsic worth, as well as the bids received, the price, and size, of the issue are determined.

This is, however, a transient advantage; the growing institutionalisation of the markets will dictate a complete switch to such modes of selling. The prevailing SEBI guidelines do allow book-building for issues exceeding Rs 100 crore. Second, bulk selling to a select club of institutional investors translates into quicker, and cheaper, selling. According to a SEBI estimate, for a domestic issue of Rs 150 crore, the issue costs can amount to as much as 9.60 per cent of the issue size while the issue costs for a comparable GDR issue would be just 4 per cent.

Third, there will be a progressive relaxation of the Euro-issue norms as the economy bumps along the path to Capital Account Convertibility (CAC). At present, access is restricted as corporates are allowed to tap these markets only on a case-by-case basis. Plus, there are end-use restrictions on the funds although they have now been relaxed to permit corporates to use upto 25 per cent of the GDR proceeds for general corporate restructuring. Expect the supply pipeline to widen dramatically if the time-table provided by the Tarapore Committee on convertibility is followed. Sanctions from the Union Ministry of Finance will no longer be required, and the end-use specification will be done away with.

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