The government has relaxed norms related to pricing of foreign currency convertible bonds (FCCB’s) and equity issues overseas through ADR/GDR to align it closer to the prevailing market price. The new norms will allow companies to look at floating overseas bond and equity issues to investors at realistic prices. This follows a number of representations by the industry to relook at the pricing norms given the sharp fall in stock markets.
The earlier norm which was amended in August’05, called for use of two averages for the pricing the issue–
(i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two week preceding the relevant date.
The final pricing was to be the higher of these two averages. However, this rule ensured that the overseas issues were to priced at a much high premium to the ruling price as the first average was invariably the higher one as the markets have crashed by more than 40% over the last six months.
But overseas investors were not comfortable in putting in money with such high premium valuation(based on six month old prices) especially in the wake of global liquidity crisis. This meant that the route of raising funds through such overseas issues became irrelevant.
The first ten months of this calendar year(Jan-October’08) has seen a total of 16 overseas issues raising a total of $1.02 billion. As compared to this in 2007, there were 32 issues raising a staggering $23.62 billion worth of funds, according to data compiled by Prime Database.
Now the pricing norms have been changed by defining the relevant price as the average of the weekly high and low of the closing prices of the related shares during the two week preceding the relevant date.
Besides, bringing the issue price closer to the ruling market prices which increases the chance of a successful completion of an overseas issue, the new norms have also changed the ‘relevant date’ for computing the issue price.
Now, companies can compute the average price taking the day on which the company’s board of directors decides to issue shares to foreign investors as the cut off point. Earlier this cut off date was thirty days prior to the date on which the shareholders’ meeting was held, which followed the board’s decision.