Interview with Linklaters' Sandeep Katwala and Kunal Thakore on trends and opportunities in India

Sandeep Katwala is the head of the Linklaters India practice and Kunal Thakore is a managing associate and a member of the firm''s India Group.

Interview with Linklaters' Sandeep Katwala and Kunal Thakore on emerging trends and opportunities in India

Sandeep Katwala is the head of Linklaters' India practice and Kunal Thakore is a managing associate and a member of the firm's India Group. In this FinanceAsia interview, Sandeep and Kunal talk about recent developments in the Indian financial markets and where they believe the most significant opportunities will emerge.

In this FinanceAsia interview, Sandeep and Kunal talk about recent developments in the Indian financial markets and where they believe the most significant opportunities will emerge.

From a legal perspective, what have been the major developments in the financial markets in Indiaover the past few years?

The Indian financial markets are undergoing tremendous change and growth in the context of strong corporate performance and significant regulatory reforms implemented by successive governments. We see four significant areas for further development in the financial markets - areas which are being driven by a combination of regulatory/policy changes and by on-going market developments.

Equity Capital Markets

One of the most significant recent developments has been the re-opening of the international equity markets for Indian corporates. The ADR, GDR and equity-linked markets have witnessed significant levels of activity over the past two years with Indian corporates accessing global capital markets through a combination of Nasdaq listings and rule 144A/Regulation S offerings.

These developments have been supported by a combination of significant regulatory changes as well as strong equity market fundamentals. For example, a number of Indian corporates have recently accessed the international convertible bond markets using the "Automatic Route" method introduced by the Reserve Bank of India in November 2003 for Foreign Currency Convertible Bonds ("FCCBs"). The Automatic Route enables Indian corporates to access the market without specific RBI approval so long as certain conditions are met with regard to size and pricing of the convertible. In effect, the guidelines allow automatic approval for issues up to US$500 million (or equivalent) with a minimum maturity of five years, with some restrictions on pricing.

While we expect the ADR, GDR and equity-linked markets to continue to expand, some confusion surrounds pricing regulations recently announced by the Ministry of Finance ("MoF") in India on 31 August 2005. The new regulations, which apply to the pricing of Depository Receipts ("DRs") and FCCBs, require that these instruments be priced no lower than (i) the average of the weekly high and low closing prices of the underlying shares in the six months preceding the relevant date and (ii) the same average in the two-week period preceding the relevant date (for these purposes, the relevant date being the date 30 days prior to the general meeting of shareholders approving the issuance in question).

There are ongoing discussions in India as to what these new pricing regulations mean and how they will be implemented by the MoF. For DR issues, the new regulations may mean that Indian corporates have limited flexibility to issue into the overseas markets below this notional floor price. It is also unclear as to how this issue will affect the volume of DRs issued by Indian corporates. Similar uncertainty surrounds how these guidelines will apply to the pricing of FCCBs. FCCBs are generally priced at a significant premium to recent closing prices of the underlying shares, and it is thought that the MoF pricing guidelines should apply only to the initial pricing of the convertible bond and should not set a floor price for the duration of the FCCB.


Securitisation transactions have been prevalent in the Indian market since the early 1990s. Since then there have been a number of transactions, primarily ABS-type transactions relating to autoloans and credit card receivables. There have, however, only been a handful of banks and institutions that have arranged and sponsored these transactions -- and the deals have also generally been privately placed amongst institutional investors and corporates. While the market for ABS transactions continues to develop - it is, by some estimates, now the second largest market in Asia (ex-Japan) - this has happened largely in the absence of any specific legal or regulatory framework relating to securitisations.

That changed (or was at least thought to have changed) in 2002 with the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 ("SARFAESI"). While the SARFAESI ostensibly seeks to establish a framework for securitisations in India, it essentially relates to the enforcement of creditor rights and particularly in the context of non-performing loans and does not address securitisation in any great detail. However, the SARFAESI is an important step forward towards establishing an environment that is conducive to the development of the market from an international perspective and we anticipate that, subject to the removal of some uncertainties, the framework will at least encourage further growth in the ABS market.

Following in the footsteps of the SARFAESI, the Reserve Bank of India recently issued a set of draft guidelines for the Securitisation of Standard Assets. These draft guidelines seek to address matters such as a standard definition of securitisation and the general arrangements between originators, the SPV issuer and investors in the context of ABS transactions. These guidelines have been subject to some criticism, particularly in relation to provisions relating to capital relief, credit enhancement and participation by originators. However, industry participants are hopeful that some of these difficulties will soon be resolved.

These developments, coupled with the growth in the domestic ABS market and the presence of multinational players, suggest that we will see a growth in cross-border securitisation transactions out of India in the near future.

Real Estate Investment in India

Market portfolio investment in the real estate sector in India through organised funds, and similar structures has historically been very limited, and while a few domestic real estate focused "funds" operate in the market, the investor base is restricted as the entry thresholds are high. REIT-type structures have also been absent, although we are now hearing of proposals to introduce appropriate structures for the Indian market.

The Indian government recently liberalised its rules relating to foreign direct investment ("FDI") in the real estate sector in India. Since March 2005, 100 per cent FDI is permitted under the automatic route to develop townships, housing, built-up infrastructure and construction development projects (although some areas still remain restricted).

While this does not, in itself, pave the way for the issue of Indian REITs, it does give us an indication of the Indian government's attitude towards this sector. And while the government may well be cautious in its approach, given sensitivities relating to foreign investment and real estate, we expect to see more activity in these areas as international players become more involved in this sector in India. Recent FDI approvals granted to international real estate companies reflect this trend.

Acquisition Finance and High Yield Debt

An increasing number of Indian corporates are looking to expand overseas through acquisitions including large conglomerates such as the Tata Group and Reliance, and companies such as Hughes Software, Sonata and Bharat Forge.

These companies are increasingly looking to leverage their acquisitions. Leveraged acquisitions have increasingly been a feature of domestic M&A transactions in the past year, as they are with foreign investors into India who are looking to balance the equity risk in their Indian investments through the use of debt.

In the M&A arena, we expect to see larger deal sizes, especially as Indian corporates step-up their international expansion plans. In addition, we expect the domestic M&A market to become more robust as a result of on-going consolidations in a number of sectors.

A related development is the increasing number of Indian corporates accessing the international debt markets through the issuance of high yield debt instruments either as a means of funding acquisitions or as part of their ongoing expansion plans. As more Indian corporates source their funding offshore in order to access US dollar financing and diversify their funding base, we expect the level of HYD issuance to increase significantly.

Where do you think the most innovative deals will come from in the Indian market?

In the short to medium term, we believe that the equity and equity-linked markets will continue to dominate in terms of deal volume. Transaction structures will increasingly follow market practice in Europe and the US - this is already happening with the adoption of accelerated bookbuild transactions in India and the increasing level of protection provided to convertible bondholders through enhanced anti-dilution provisions in the bond conditions.

Another area of growth in the short to medium term will be in the area of acquisition finance. We are seeing an increasing number of acquisitive Indian corporates chasing larger deals in India and globally, which potentially means significant financing requirements. A good example of this is the Chatterjee-Haldia group's proposed participation in the acquisition of Basell.

Over a longer period, we expect to see further development in the ABS or MBS-related markets, although this ultimately depends on a suitable regulatory framework being put in place. A number of market participants are looking at different structures to adopt in India but ultimately face constraints due to the current regulatory framework.

What do you see as being the biggest challenge to the introduction of new products in the Indian market?

From an international perspective, the biggest challenge will be regulation and the regulatory framework in India. First, there is currently no clarity on the level of foreign investment that is permitted in a securitisation company. It has been suggested that the limit will be 49 per cent, but there have been no formal proposals in this regard. The tax treatment of securitisation is also not free from ambiguity, as there are no specific tax provisions dealing with securitisation and the tax treatment is market driven and based on generic tax principles. The other very significant factor is the track record of the SARFAESI in terms of how it facilitates debt recovery processes, procedure and timing. The development of a robust and effective remedy against debtors will be an important element of the investment decision and something with which investors will need to become comfortable.

As regards investments in the real estate sector, typical REIT-style structures are difficult to replicate in India under current regulations, and it is likely to be some time before such a transaction may emanate from India. That will not however prevent the development of bespoke transactions.

What has Linklaters been doing recently in India?

We have been involved in a number of recent capital markets transactions in India including international equity share offerings, convertible bond offerings and debt issues. Our lawyers have specific on-the-ground experience structuring and executing transactions in India and are familiar with India-related issues. Our India banking credentials (both acquisition finance and acquisition-related) are also unparalleled in the market.

We recently formalised our India Group which is led by Sandeep Katwala and comprises a number of dual-qualified lawyers who are specifically tasked with monitoring and developing our involvement in the Indian market. The Group (comprising partners and lawyers from London, Hong Kong, Singapore and Tokyo) supports members of the firm across practice groups, where necessary, to add their specific India experience and knowledge to transaction teams.

For further information:


Sandeep Katwala

Tel: (44) 20 7456 5972

email: [email protected]

Kunal Thakore

Tel: (44) 20 7456 5875

email: [email protected]

Hong Kong

Stuart Salt

Tel: (852) 2842 4154

email: [email protected]

Jeremy Webb

Tel: (852) 2842 4870

email: [email protected]

Patrick Sheil

Tel: (852) 2842 4124

email: [email protected]

Dean Lockhart

Tel: (852) 2842 4141

email: [email protected]

John Maxwell

Tel: (852) 2901 5251

email: [email protected]


Kevin Wong

Tel: (65) 6890 7333

email: [email protected]

Philip Badge

Tel: (65) 6890 7331

email: [email protected]


Paul Kruger

Tel: (81) 3 6212 1432

email: [email protected]