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360 Degree View june 2024
1. Companies have received SEBI approval to raise ₹20,000 crore via IPOs so far: Prime Database Group MD
The IPO market in India is currently robust, with 18 companies having secured SEBI approval to raise around ₹20,000 crore this year. Recent trends indicate a significant uptick compared to past election cycles, with 52 IPOs collectively raising ₹50,000 crore in the six months preceding this year’s elections. Despite historical trends of low IPO activity during election periods, seven IPOs launched during April and May raised nearly ₹15,000 crore, marking an anomaly in this election season.
Looking ahead, a pipeline of 37 companies seeks to raise ₹50,000 crore, driven by buoyant secondary markets and strong investor interest from domestic sources across institutional and retail sectors.
The Fresh Capital raised via IPO in the first half of the Year (surged highest in nine) indicates a slow revival in Capital Expenditure by India’s Private sector. According to data from primedatabase.com out of the funds raised by 37 companies in 2024, about 45% were through new shares which is the highest proportion since 2015 when India Inc. raised nearly 48% fresh capital. As per IPO Documents, the funds raised as fresh issues in 2024 were to either finance capital assets or retire existing debt obtained to build capacities. Further, most recent public offerings are from the manufacturing sector seeking funds for both Capital Expenditure and Acquisition
This diverse sector participation, including companies like Afcons Infrastructure, Bajaj Housing Finance, and Waaree Energies, reflects optimism for a robust IPO market in 2024-2025, supported by favorable market conditions and investor confidence.
2. Unlisted local units of MNCs under ROC radar
The Indian authorities are now expanding their checks on the ownership structures of local arms of Multinational Corporations (MNCs). The Registrars of Companies (ROCs) are now scrutinizing the company disclosures and shareholding information of about six unlisted Indian units of MNCs.
This follows recent action, where the ROC penalized Samsung SDI India Pvt. Ltd and Samsung Display Co. Noida Ltd for not identifying Samsung Electronics Co. Ltd, Executive Chairman Mr. Lee Jae-Yong as a Significant Beneficial Owner (SBO). Further, ROC of Delhi and Haryana imposed penalties of Rs.27 Lakhs on LinkedIn Technology Information Pvt Ltd, Microsoft Corporation, Chief Executive Satya Nadellae, LinkedIn CEO Ryan Roslansky, and seven other individuals for alleged violation of SBO Reporting.
India is adding about 150,000 new businesses every year, including companies and limited liability partnerships (LLPs), and will soon be reaching the level of some of the developed countries in Europe. Hence unless the quality of enforcement is good, it can cause problems in the future.
Regulatory action against alleged non-disclosure of beneficial owners is the move for a broader effort to improve enforcement of provisions, removal of defunct companies, and detection of shell companies, ensuring transparency of business ownership.
This regulatory focus on enforcing Significant Beneficial Ownership provisions is related to the Country’s review by the Financial Action Task Force (FATF), which sets global standards for fighting against money laundering.
3. Independent Directors: Few Standups while stepping down
SEBI urges Independent Directors to enhance disclosures and uphold corporate governance standards amidst resignations citing “personal reasons.” Only a small fraction has cited governance or transparency concerns. Recent resignations by Nisaba Godrej citing accountability issues and Marc Desaedeleer citing transparency in their Board resignations. Corporate lawyers anticipate increased disclosures from independent directors resigning for “personal reasons” starting in October, following SEBI’s directive. The amended Listing regulations require directors to explain their rationale for remaining on other boards, aiming to address transparency concerns in resignation disclosures. This move underscores SEBI’s efforts to enhance accountability and governance standards in corporate board resignations Several Independent Directors have recently resigned, citing corporate governance issues as the primary reason for their departure. This trend is anticipated to continue, potentially resulting in significant financial and operational implications for the affected companies. The chairman, who chose to remain anonymous, emphasized that listed companies must be attentive to these resignations.
The proposed changes in Corporate Governance norms, currently being finalized by the SEBI are part of an effort to address these issues. The Regulatory Authorities are considering barring Independent Directors who do not provide reasons for their resignations from being appointed to other boards. Independent directors are accountable to the shareholders who appointed them and trusted them to disclose their reasons for resignation. Accountability must accompany authority, and directors should clearly state their reasons for resigning.
The Chairperson of a leading consumer company emphasized that the culture and effectiveness of the board are the responsibility of the chairperson or promoter. A Board’s independence is influenced by the encouragement of diverse views and opinions by the chairperson or promoter, which strengthens organizational culture.
4. Demat and Mutual Funds Accounts will not be frozen due to non-filing of Nomination.
In response to the representations made by the Market Participants and to ease compliance and boost investor confidence, I was informed by the SEBI that there won’t be a freezing of the Demat Account or the Mutual Funds Accounts of the Investors if they have not submitted their nomination.
The Investors who are holding their securities in Physical form shall be eligible to receive Dividend, Interest, or Redemption payment and also to lodge a grievance even if they have not submitted their nomination.
The SEBI further stated that the Dividend, Interest, or Redemption payments which are presently withheld by the Listed Companies due to non-filing of nomination, shall be processed accordingly.
However, all the new investors are mandatorily required to submit their nominations in respect of the Demat and Mutual fund Accounts.
5. Focus shifting from Auditors to Audit Committees.
The NFRA chairman’s recent observations are that the Company’s audit panels cannot avoid blame by citing audit failures and have redirected attention from auditors to audit committees. This serves as a wake-up call for audit committees, emphasizing the need for them to seriously play their roles and exercise their responsibilities.
The audit ecosystem is a combined role of various stakeholders wherein the audit ecosystem involves various key players, including statutory auditors, internal auditors, IT and systems auditors, and the audit committee, to ensure financial statement reliability and compliance. While audit committees are required to follow regulations, the NFRA expects them to go further, acting as both watchdog and bloodhound, with a stronger emphasis on the latter role.
Now, with advancements in analytics and sampling techniques, audits are transitioning into continuous processes. This means audits are conducted more frequently and interactively every quarter rather than being a yearly affair. The audit committees going through the audit agenda without active interaction with the auditors should be a thing of the past.
The audit committees are now expected to focus on the methodology adopted by auditors and capture the same in the minutes. They should question the audit process more deeply and satisfy themselves with the same.
Before the Quarterly meetings, the Audit Committee is now expected to spend some time with Statutory Auditors to understand how the limited review or audit is carried out and be satisfied with the process adopted. One relevant question generally put across is whether there were any contentious accounting-related issues discussed with the management and how they were resolved. The questions should also cover the audit process and methodology, including the tools used. It’s crucial to document interactions and discussions during audit meetings.
There is a pressing need for clear guidelines from NFRA on audit methodologies and Related-Party Transactions (RPTs) for audit committees. The focus should be on proactive education and thought leadership to prevent issues, rather than reacting after incidents occur. It warns against shifting responsibility from the Auditors to the Audit Committees to the extent that the Audit Committee shall play a bloodhound role, while auditors take a watchdog role, potentially leading to better outcomes.
6. Growth in the Management Consulting Business of Big Four Firms
There has been Significant growth in the Management Consulting Business of Deloitte, EY, PwC, and KPMG (“the Big Four Firms”) due to an increase in the demand for multifunctional expertise, Strong Client relationships, and a favorable price proposition as compared to the other high-end rivals in the Business.
The Management Consulting Business of the Firms has seen a growth of 25% – 30% in the last two years. The Collective revenue of all the firms from pure management consulting business generates a Revenue of Rs. 3,000 Crore – 3,500 Crores, where EY leads with a revenue of more than Rs. 1,300 Crores.
7. Global Capability Centre's Share in GDP to double by 2030 with a size of $100 billion
India accounts for about 50% of the world’s GCCs, and the sector grew by 11% between 2015 and 2023, surpassing the 7% growth of the broader IT services sector in the same period.
The ICICI Securities shared a note stating that the share of Global Capability Centers (GCCs) in India’s GDP is projected to Double by 2030. The offshore units of MNCs collectively generate a revenue of $46 billion which is expected to rise upto $100 billion by FY 2030.
Despite their growth, GCCs have not been immune to macroeconomic challenges affecting the IT industry. The addition of new GCCs slowed in 2023, with 47 new centers compared to 65 in the previous year. Analysts attribute this slowdown to the post-pandemic digital rush which is now settled. The next wave of companies GCC setups in India will come from Fortune 1000 to Fortune 5000 companies and these are smaller companies adding a smaller headcount to their global payrolls.
8. SEBI unveils stricter norms for Inclusion of Individual Stocks for Derivative Trading
SEBI has tightened eligibility criteria for individual stock inclusion in the derivatives segment, responding to concerns over speculation. It has introduced Fixed Price Offers as an Alternative Delisting Mechanism to a Book Built price Discovery and formed a working group to enhance investor protection in futures and options trading and improve risk metrics to develop and regulate the market.
Further, it has been highlighted the concerns about Speculative Trading Patterns in Futures and Options (F&O), emphasizing their non-hedging nature and potential risks to investor protection. Also underscored the redirection of household savings towards speculative activities rather than productive economic endeavors, posing a macroeconomic perspective SEBI’s new regulations focus on individual stocks in the derivatives market, distinct from Index-Based Trading which aims to enhance oversight by adding and removing approximately two dozen stocks based on revised eligibility criteria, ensuring alignment with market dynamics and investor protection.
Additionally, SEBI’s efforts also highlighted strengthening the link between cash and derivatives markets through regulations, including mandatory physical delivery of open positions upon expiry. Criteria for inclusion of stocks in the derivatives segment have been updated to reflect current market conditions, adjusting parameters last set in 2018. Exit criteria are now specified for stocks that have completed six months from entry into the Derivative segment and based on performance would be applicable three months post-circular issuance.
9. SEBI Advisory on Special Rights of Private Equity Investors in IPO-bound Companies
SEBI had issued an advisory to merchant bankers stating that Private Equity (PE) Investors must cancel their special rights, such as nomination, veto, information, anti-dilution, rights of first refusal, tag-along rights, and divestment rights when the investee companies file their updated IPO documents i.e., Updated Draft Red Herring Prospectus (UDRHP).
This requirement impacts PE investors to risks if the IPO does not materialize, as these rights form part of their Shareholder Agreements based on their Shareholding and Investment. Industry experts argue that nullifying these rights before listing undermines the basis of PE investments and raises concerns about reinstating such rights if the IPO fails.
Later, SEBI backtracked on its advisory indicating that the earlier advisory would be modified based on industry feedback and now reads: that all special rights granted to shareholders under AOA, SHA, or through any arrangement or agreement shall lapse on the date of listing.
10. Focus on Energy Efficiency
At the First India climate summit of the Times network on June 28, 2024. Bhupendra Yadav the minister for environment forest and climate change said the citizens are required to cultivate an ‘Environmental Sense’. He proposed that citizens strike a middle path by developing a sense of what each one of us can do to prevent mindless utilization and focus instead on mindful consumption.
Greenhouse Gas emission inventory reports suggest that despite being home to 18% of the global population India’s Carbon emissions account for less than 4%.