Markets

A firm planning to raise finances may tap one or more of the following capital markets:

Indian Capital Market: A firm accessing the Indian capital market has to conform to the regulation of the Securities and Exchange Board of India (SEBI).

Euro Capital Market: The euro capital market is a global market beyond the purview of any national regulatory body. Many firms in India have accessed this market since the early 1990s using instruments like Global Depository Receipts (GDRs) and Euro Convertible Bonds (ECBs). Firms interested in accessing this market have to take the approvals of Ministry of finance, Foreign Investment Promotion Board, and Reserve Bank of India.

Foreign Domestic Capital Market: Some Indians firms have accessed or are in the process of accessing the domestic capital market of US (through instruments like Yankee bonds and America Depository Receipts), UK and Japan. Obviously an Indian firm interested in accessing a foreign domestic capital market has to obtain clearances from authorities as well as the regulatory bodies of the foreign country.

How do the three markets compare in terms of access, market size, cost of issue disclosure and transparency requirements, and prices/rates?

Pricing and Timing: Along with choice of instrument market and mode, the firm has to determine when and at what price should its issue be made. Since pricing and timings are closely inter related they may be discussed together.

If the capital market is efficient in the sense that the market price is always equal to the intrinsic value, the simple guideline with respect to pricing and timing would be: raise finances whenever they are required by issuing securities at prevailing Market process.

Since the market price and intrinsic value may diverge in real life situations, pricing and timing are important issues. Bear in mind the following guidelines while resolving these issues.

Decouple Financing and Investment Decisions: Opportunities for smart moves on investment and financing side of the business often do not synchronize. Hence financing decisions should be decoupled from investment decisions Simply borrow when conditions seem non-oppressive and hope that company will later find intelligent expansion or acquisition opportunities, which as we have said are more likely to pop up when conditions in the debt market are clearly oppressive. Our basic principle is that if you want to shoot rare, fast moving, elephants, you should always carry a loaded gun.

Never Be Greedy: If present are favorable or a certain type of financing, take advantage of it. Driven by greed, do not wait for an even better possible tomorrow. The advice of Bernard Baruch formulated for the stock market investor applies equally well to the participant in financial market: Leave the first 10 per cent and the last 10 per cent for someone else.

Ensure Inter-generational fairness: Tapping the equity market when it is buoyant does not mean that the firm should price its equity issue far above its intrinsic value. If it does so, existing shareholders will benefit at the expenses of new shareholders. While it may appear alluring in the short run, it may not be advisable in the long run. Firms which succumb to such a temptation for immediate gains may eventually alienate new investors and lose credibility in the capital market. To ensure inter-generational fairness among equity shareholders, the firm should price its issue at more or less the intrinsic value and to more or less guarantee an encouraging response to its issue, the firm should approach the market when it feels that the market price is higher than the intrinsic value by a margin of say 20 per cent.