Equity Financing Alternative

Equity Financing Alternatives

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GDR Process Overview

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GDR Considerations

A GDR is a positive step towards accessing blue-chip investors who are holders of L&T

and its comparables in Europe and Asia


Pros and Cons of Listing in London Stock Exchange vs. Luxembourg Stock Exchange

GDR

London Stock

Exchange

Luxembourg

Stock Exchange

Pros: Only London has a dedicated GDR trading

platform, the International Order Book

(“IOB”)

– Order-driven, fully electronic, real-time

trading reports

Historically faster process than London Stock

Exchange

Enhance liquidity by making GDRs available

for trading in London on the IOB

No IFRS requirement (1)

L&T is Currently listed on Luxembourg

Cons: IFRS requirement (1) Less liquid than London Stock Exchange

London Stock Exchange Luxembourg Stock Exchange

GDR Listing Alternatives Considerations

A follow-on GDR listing would further allow L&T access to

additional world-class investors

GDRs have been issued by several Indian companies in recent

times due to the faster listing process and less stringent corporate

governance requirements

The London and Luxembourg stock exchanges are the two main

listing venues for Indian GDR issuers

Difficult to maintain significant liquidity in GDR listing due to

“flowback” to home market

___________________________1. IFRS financials will not be required for listing on the Professional Securities Market of the London Stock Exchange or the Euro MTF market of the Luxembourg Stock Exchange.

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Indicative GDR Offering Process Timeline

Week

1 2 3 4 5 6 7 8 9 10 11 12Process

Appointment of bookrunners, lawyers, and accountants

Preparation of Audited Financial Statements

Organization Meeting

Due Diligence

Prepare Draft Preliminary Prospectus

GDR Specific Process

File Offering Circular with Stock Exchange

Offering Circular Review Period

Investor Education (Outside of the US only)

Print & Distribute Preliminary Offering Circular

Roadshow

Pricing, Allocation and Sign Documentation

Closing and Payment

Print Final Offering Circular

___________________________Note: This timetable assumes that the issuer has financial statements for a three-year period that have been audited by a major accounting firm and that there are no accounting issues in the registration statement

raised by UKLA.

GDR offering can be completed in 8 to 10 weeks on LUX and 12 to 14 weeks on LSE

IFRS accounts will further extend the

timeline

London SE approval may take up

to 3 weeks



ADR Process Overview

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ADR Listing

An ADR listing will provide L&T a strong brand awareness around the worldADR Process Overview

Pros and Cons of Listing in NYSE vs. NASDAQ

ADR

NYSE

Pros:

World’s largest equity market with the broadest reach of investor base

High liquidity

Highest international visibility & profile

Largest research following

Potential valuation benefits

Cons:

Full SEC disclosure and U.S. GAAP reconciliation

- SEC contemplating inclusion of IFRS for foreign issuers

Stringent corporate governance responsibilities

Ongoing reporting responsibility

Highest initial / ongoing costs / fees

NYSE

ADR Listing Alternatives Considerations

ADR listing can help L&T to gain access to broader investor

base than GDR listing, including US focused funds and US retail

investors

All substantial (>300 mm) international offerings by Indian

companies have been through this route, over the last 2 years

Aftermarket trading could be at a premium to local market price

– Adequate float ensures higher liquidity for good aftermarket

ADR takes longer time than GDR given the requirement of full

SEC disclosure and U.S. GAAP reconciliation


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Indicative ADR Offering Process Timeline

Week

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19Process

Appointment of Bookrunners, Lawyers, Printer,

Escrow Agent

Preparation of US GAAP Financial Statements /

Sarbanes Oxley Compliance

Organization Meeting & Due Diligence

Prepare Draft Offering Document

SEC Filing and Approval

Analyst Research

Investor Education

Shareholder Approval

Management Road Shows


Settlement (Delivery, Payment)

Trading Commences

Timeline will depend on preparation of US GAAP

financial statements (1)


___________________________1. SEC contemplating to relax accounting norms to include IFRS for foreign issuers


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___________________________

1. In the absence of such a committee, the issuer’s entire board of directors may act as the audit committee if each member of the board is an independent director.2. A controlled company is defined as a company of which more than 50% of the voting power is held by an individual, group (as defined per Section 13(d)(3) of the Exchange Act) or another company.

Sarbanes – Oxley Compliance

Company executives are required to personally certify reports filed with the SEC

– Certification must be made with regards to material disclosures, fair presentation of financial

statements and other financial information, and the adequacy of internal financial controls

Issuers must establish an Audit Committee (1)

– Each member of the committee must be an be an independent member of the board of directors

of the issuer (e.g., officers of the issuer are not permitted to serve on the committee)

Responsibilities of Audit Committee include:

– Pre-approval of all audit and non-audit services to be performed by independent auditors

– Appointment, compensation and oversight of registered accounting firms

– Establishment of procedures regarding accounting, accounting controls or auditing complaints

Section 16 Forms (Forms 3, 4 and 5) must be filed electronically through the EDGAR system

Required disclosure of all material correcting adjustments identified by the issuer’s independent

auditor in accordance with GAAP and SEC rules

New rules requiring disclosure regarding off-balance sheet arrangements and contractual obligation

Need at least 1 independent director on the audit committee at IPO time

Need a majority of independent directors on the audit committee within 1 year following IPO

Need fully independent nominating and compensation committees and a majority independent

board within one year following IPO

Exception is for controlled companies (2), which only need independent audit committee

Foreign issuers involved in an IPO are entitled to a transitional period to comply with certain

Section 301 standard on audit committee independence

Audit Committee Requirements

CEO / CFO Certifications

Enhanced Disclosure

Independent Directors


Deadline for Foreign Issuers


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Financial Statement Disclosure Requirements

Full annual financial statements

– Audited financial statements must cover each of the latest

three financial years

Full interim financial statements

– If a registration statement becomes effective more than nine

months after the end of the prior audited financial year then

interim six month (or nine month, if available) financials

must be provided

– Interim financials must be in U.S. GAAP and audited

financials are preferred

Selected financial information

– Selected income statement and balance sheet data for the past

five years is required

– Financial data for the two earliest years may be omitted if the

issuer can represent to the SEC that such information cannot

be provided without unreasonable effort

– If interim financial statements are included then the selected

financial information should include the interim period as

well as comparative data from the same period in the prior

year

Quarterly financial information

– Disclosure of selected financial information for the previous

eight quarters is common practice for NYSE IPOs

Disclosure Comfort Letter Constraints

If the transaction closes in Q308 or Q408, the comfort letter

requested from the auditor will likely encompass:

– Assurance that Q208 or Q308 financial information has

been audited

– Inquiring of company officials on any changes to financial

statement elements after financial period cut-off

– Agreeing Q208 or Q308 financial information to the

Company’s accounting records (“tickmark” comfort)

For each of these comfort letter elements, the auditor will

require that the audit fieldwork to be substantially complete

The standard for “substantially complete” may differ among

auditing firms

The auditor’s comfort letter procedures will likely dictate the

closing of the transaction in the quarter of December 2007 or

March 2008



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On-going U.S. Reporting Requirements

SEC reporting requirements for listed foreign issuers

Document Content Filing Requirement

Original Registration

Form F-1 Disclosure requirements include business, legal and

financial matters:

– Financial disclosure requires 3-years of audited

income statements and 2 years of audited balance

sheets. The 2 most recent years must be

reconciled to US GAAP

Form F-1 must be declared effective by the SEC prior to

listing of securities in the US market

Ongoing Requirements

Form 20-F The issuer must file an annual report with the SEC.

This will include:

– financial statements reconciled to US GAAP; and

– a high level of disclosure concerning the issuer

and its officers and major shareholders

Form 20-F must be filed annually, within six months of

fiscal year-end

Form 6-K US market receives all information provided to

shareholders in the country of domicile, as frequently

as such information is filed in the home market. This

includes:

– interim financials; and

– updates on significant corporate developments

As soon as possible after release of any such information

in the home market



QIP Process Overview

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Qualified institutions Placement (QIP) Guidelines

Recently introduced QIP Guidelines provides an accelerated domestic fund raising

option Equity shares or securities convertible into equity shares with a maximum conversion period of 60 months

Restricted to issuance of primary securities only; no secondary shares can be sold through QIP route

To be listed on the domestic exchanges

Qualified Institutional Investors as defined by the SEBI DIP guidelines

Minimum 10% allotment to domestic mutual funds subject to adequacy of demand

Minimum two allottees for issue sizes < Rs. 250 crores, and minimum of five allottees for issue size > Rs. 250 crores

No single allottee to have more than 50% allotment

No allotment permitted to QIBs having veto rights, and rights under shareholder agreement to appoint nominee

directors pursuant to existing equity position

Total capital raised in one financial year cannot exceed five times the networth of the issuer in the preceding financial

year, net worth being defined as per SEBI DIP guidelines

SEBI floor price similar to FCCB and GDR pricing norms applicable

No pre-issue filing with SEBI required

Placement document to be a private document distributed to select investors

Document should be made available on the website of the relevant stock exchange and the website of the issuer

A copy of the placement document to be filed with SEBI within 30 days of allotment

Investment bank to provide due diligence certificate to stock exchange

Placement of shares with QIBs as defined in DIP guidelines by listed companies, through specific resolution under

section 81(1A) of the Companies Act

Shareholder resolution to specifically state that the issue is under the QIP guidelines

Offering within 12 months of the shareholder resolution; minimum 6 months gap between any 2 offerings under the

same resolution

Securities

Investors

Issue Size

Pricing

Documentation

Other Considerations



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Impact of the QIP

Timelines crunched to approximately 7 weeks

from approximately 14 weeks for a regular

follow on offering

Pricing norms same as GDR placement norms

Cost to issuer will reduce as certain cost

elements like printing, advertisement, PR,

registrar and refund cost will get reduced

substantially as compared to a regular follow on

offering

Float will remain in a single market as

compared to split floats in a GDR offering by a

listing company

For Issuer

Easy availability of blocks given the

requirement of minimum number of 49

investors

No lock in requirements if shares acquired

under QIP are sold through recognized

exchanges

Speed of execution and delivery

No margin money (10% in follow on offerings)

payment is involved

Discretionary allotment beneficial for quality

investors as against proportionate allotment in

domestic follow on offerings

For Investors



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Indicative QIP Process Timeline

Week

1 2 3 4 5 6 7Process

Appointment of bookrunners, lawyers, and accountants

Organization Meeting

Due Diligence

Prepare Draft Preliminary Prospectus

File Offering Circular with Stock Exchange

Investor Education (Outside of the US only)

Print & Distribute Preliminary Offering Circular

Roadshow


Closing and Payment

Print Final Offering Circular

QIP offering can be completed in 6–8 weeks



Rights Process Overview

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Indicative Rights Issue Process Timeline

The rights issue process would require approximately 22 weeks

The disclosure requirements for a rights issue are essentially the same as that for a public issue

– However the main distinction is that the un-audited financials up to one completed month prior to the issue need to

be disclosed

Rights Issue price has to be fixed on date of issuing notice for record date – for computing ex-right price


Week

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22Process

Notice to stock exchange for board meeting

Board Approval

Preparation of restated financial statements

Due diligence & Drafting of offers document

Filing with SEBI & SE

SEBI Comments

Incorporate SEBI comments

Notice period for record date and fix issue price

Printing of forms and Compiling shareholders details

Rights AD notice period

Issue period

Post Issue / Allotment / Listing


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Rights Issue – Key Disclosures

Restatement of financial statements

In addition, profit or loss must be disclosed before and after considering extraordinary items

Clause 6.10.2 lays down guidelines relating to financial disclosure

– Clause 6.10.2.7.(b) relates to situations where retrospective adjustments in accounts are required for the last 5 years

Relevant financial disclosures, including a report by accountants, are also required if the any part of the proceeds of the issue are to be

applied in

– The purchase of any business

– The purchase of an interest in any business

– The acquisition of shares in a company

Due to the nature of the disclosure requirements, the auditors should be brought on board as soon as possible

Retrospective

Restatements of

Accounts for the last 5

years required for…

Past Audit

Qualifications

Material Amounts Relating to

Adjustments for Previous Years

Changes in Accounting

Policies

Incorrect Accounting Policies Followed in

Previous Years



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Rights Issue – Key Disclosures

Group related information

Nature of activities

Shareholding pattern

Composition of the board of directors

Information regarding adverse factors

including sickness & disassociation

Share price movement during the

preceding six months

Disclosures for changes in capital

structure of group companies

General Disclosures

If any of the group companies has made a

public or rights issue in the preceding

three years, disclosure relating to

– The issue price of the security

– The current market price and

– Particulars of changes in the capital

structure since the date of issue

If an implementation schedule was given

in the original offer document,

– A mandatory statement with the

current cost and progress of

implementation of projects is required

Public / Rights Issue Related

Financial information for the last three

years based on the audited financial

statements including

– Equity capital

– Reserves

(excluding revaluation reserve)

– Sales

– Profit after tax

– Earnings per share

– Net asset value

Financial Disclosures

Clause 6.10.3 of the SEBI DIP guidelines, requires disclosures in relation to

– The promoters

– Companies, firms, ventures, etc. promoted by the promoters, irrespective of whether these are covered under section 370 (1)(B) of the

Companies Act, 1956

In case the Issuer company has more than five listed group companies

– SEBI allows disclosure to be restricted to the five largest listed companies determined on the basis of market capitalization 1 month

prior to the filing the draft prospectus

– However, financial disclosure is mandatory for group companies that are sick, under winding up or have a negative net worth



FPO Process Overview

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Follow-on Public Offering Process

Book Building process:

Price range allowed (with a cap upto 20% of the floor price) with flexibility to move the band in 20% range

Book open for 3 – 7 working days (3 additional days if the band is revised)

Book building process is entirely transparent – Demand at various price levels displayed on real time basis

Investors apply with their respective bids through appointed brokers

– Investors have option to give three bids

– Investors can revise their bids during the course of the bidding period (books opening to books closing)

Offer price decided by company based on the demand - price matrix

Qualified Institutional

Buyers (QIBs)

Retail Investors Non - Institutional

Definition Qualified Institutional Investors

Individuals applying for Rs 100,000 or less per application

All other investor categories

Allocation – Issue

Size > 25% of post

issue capital

Minimum 50% At least 35% (Subject to demand)

At least 15% (Subject to demand)

Allocation – Issue

Size < 25% of post

issue capital

Minimum 60% At least 35% (Subject to demand)

At least 10% (Subject to demand)



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Indicative FPO Process Timeline

Week

1 2 3 4 5 6 7 8 9 10 11 12 13 14Tasks

Appointment of Bankers Lawyers

Management Presentation Kick-off

Documentation & Due Diligence

Preparation of Accounts (recasting, etc.)

File Draft Prospectus

SEBI Review

Comments received

Investor Education

Final Approval

Print Red Herring

Launch offering, Distribute “red herring”

Finalise price band

Roadshow / Bookbuilding

Issue opens

Conduct bringdown due diligence

Sign under-writing agreement

Pricing

___________________________Note: The offering can be priced in about 12 weeks – settlement and listing would take upto another 2–3 weeks.



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Issue Marketing Process

Target investor universe

– MFs, FIIs and insurance cos

– Indian institutions

– Sector investors

– Value / growth funds

– Retail investors

Investor identification

Investor warm-up

– Identify interested target investors

– Identify concerns and begin

discussions

for valuations

Pre-marketing

Pricing

– Allotment

– Closing

– Investor relations

Short-term

Direct marketing

Research coverage

Equity sales force

Shareholder education

Issue opening

One-on-one meetings of interested

investors with the management

Lunch / group meetings

Roadshows and meetings

Research coverage

Value creation

Communication to investors

Create momentum for conversion

Long-term

Preparation Execution Post-marketing


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NCD + Warrant Overview


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NCD + Warrant: An Introduction

“I propose to enhance the tradability of domestic convertible bonds by putting in place a mechanism that will

enable investors to separate the embedded equity option from the convertible bond and trade it separately,"

Finance Minister P Chidambaram in Budget 2008. (1)

– The NCD + Warrant is a hybrid product that has gained popularity in recent months as a cost-effective source of financing

• Precedent issues include HDFC, Bharat Forge and Gujarat NRE Coke Ltd.

– The broad economic rationale for considering an NCD + warrant structure is similar to that of a convertible bond:

• Lower cash cost of a straight debt security by providing investors an equity warrant

• Equity warrant is typically struck at a premium to current stock price to minimize dilution

• Conversion or exercise of the equity warrant mitigates refinancing risk

– The key differences between a convertible bond and a NCD + warrant structure are:

1. Source: Business Standard

Foreign Currency Convertible Bond NCD + Warrant

Warrant Premium Imbedded Warrant Premium is used to reduce the

ongoing coupon payments required

Warrant Premium is paid to the Issuer upfront

maximizing upfront proceeds received

While the NCD coupon is higher than a convertible

bond, the warrant premium can be amortized over the life

of the NCD to compute the effective yield

Marketability Sold as a stapled non-separable security to foreign

investors

FCCB market conditions are currently challenged for

mid-cap Indian issuers

Debt (NCD) and equity (Warrants) components are

separable, which helps achieve optimal pricing

Debt pricing benefits from strong onshore bid for credit


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Benefits of NCD + Warrant Structure

Key takeaways from recent issuances for NCD + warrant structure

Ability to size NCD + warrant independently

While Bharat Forge decided to match the size of the warrant notional to the NCD size, HDFC had a larger NCD size relative to the warrant

notional

ABC can structure the size of the warrant notional and the NCD amount in line with its objectives

Warrants can be customized based on desired premium / issuance price

Lower strike prices correspond to higher premiums and increase the likelihood that the warrants will be exercised

Higher strike prices would lower the initial premium generated by ABC but lower the likelihood of incremental dilution

ABC can consider issuing warrants with varying strike prices and maturities

Can be executed in conjunction with an equity placement

Recent Bharat Forge transaction was essentially a "combo" transaction, where "cheap" warrants were used to compensate equity investors for

participating in the equity offering at a tight discount (constrained by the SEBI floor price)

Diversify investor base

NCD would need to be marketed to only domestic investors

Warrants may be marketed to domestic and foreign investors

Does not require quarterly mark-to-market provisions based on foreign exchange movements

Provides clarity on debt and equity components, thereby allowing proper treatment of amount raised as debt (by lenders and rating

agencies) and equity dilution (by analysts and equity holders)

1

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The NCD + Warrant is a customizable form of financing raise that can help ABC realize its financing objectives


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Indicative NCD + Warrant QIP Timeline

We believe that an issuance could be completed within 4-6 weeks

Process

Appointment of bookrunners, legal counsels, and NCD rating agency

Kick-off meeting with the company and auditors

Due Diligence and Filing of applications with RBI / FIPB, as required

Prepare and Finalize preliminary Placement Document

Non Deal Roadshow

Receive NCD rating from rating agency (10-15 days)

Receive RBI / FIPB approval

File and Receive approval under clause 24(a) of listing agreement

Execute all agreements; Open and Close the Issue

Allocation and Pricing

Finalize Placement Document

Payment and Allotment

Listing and Trading

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ve London or Luxembourg stock exchange listed offering of equity to institutional investors

– Can be an add-on to existing GDRs

High visibility, especially if listed on the London Stock Exchange main board

IFRS accounts will have to be prepared in case of a London main board listing

US SEC registered offering of equity to retail investors in the US and institutional investors

Highest visibility amongst the international investor community

Will have to prepare US GAAP accounts and be Sarbanes Oxley compliant – ongoing compliance

requirements

Accelerated placement of primary equity with domestic and international investors under the

SEBI DIP guidelines

Fastest time to closing

Low visibility relative to international offerings

Issue of primary equity shares to existing shareholders

Rewards existing investors by exclusively allowing them to subscribe to fresh equity

Lengthy execution timeline of 22 weeks

Issue of primary equity shares to retail shareholders in India and institutional shareholders

Further increase domestic float

Long execution timeline - 14 to 16 weeks

American Depository Receipts (“ADR”)

Global Depository Receipts (“GDR”)

Summary of Alternatives

A range of international and domestic equity raising alternatives are available to L&T


Domestic Offerings

Rights Issue

Qualified Institutional Placement (“QIP”)

Follow on Public Offering (“FPO”)

International Offerings

Alternative Key Considerations


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Evaluation of Options

Regulatory

Process

Liquidity


Least Favorable Most Favorable

International Offerings Domestic Offerings

GDR - London GDR - LUX ADR QIP Rights FPO

NA NA NA

Costs

Investor Base

Trading

Premium

Visibility

Timeline


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Comparison of Alternatives

International Offerings

GDR – London GDR – Luxembourg ADR

Execution Timeline Moderate execution timeline

12 to 14 weeks

Relatively faster execution timeline

8 to 10 weeks

Could be faster as L&T is already listed on LUX

Lengthy execution timeline

20 to 24 weeks

Transaction Cost Moderately expensive process

IFRS audit expenses

Cost efficient Relatively high expenses

SEC / SOX compliance costs

Investor Base International institutions

– US investors under rule 144A

International institutions


Largest pool of demand

Access to all US investors (including retail)

Japanese investors through a POWL

Pricing At or around the prevailing market price

SEBI pricing regulations will have to be adhered to

At or around the prevailing market price


Pricing at or around prevailing market price

– ADRs usually trade at a marginal premium to underlying

SEBI floor price regulations must be met

Regulatory

Requirement

London Stock Exchange approvals required

– 3 to 4 week process

Luxembourg Stock Exchange approvals required

– 2 to 3 week process

SEC approval required

– 6 week process

Liquidity Impact Relatively greater liquidity than Luxembourg

– Eventual flow back to Indian exchanges increases liquidity

Illiquid in the international market

– Eventual flow back to Indian exchanges increases liquidity

Highest aftermarket liquidity and transparency

Continuous market making and trading

Visibility High level of visibility with a large section of international investors

Moderate visibility Highest level of visibility and publicity

Dilution Dilution of existing shareholders Dilution of existing shareholders Dilution of existing shareholders



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Comparison of Alternatives (cont’d)

Domestic Offerings

QIP Rights Issue FPO

Execution Timeline Quick execution timeline

6 to 8 weeks

Longest execution timeline

22 to 24 weeks

Lengthy execution timeline

14 to 16 weeks

Transaction Cost Most cost efficient

Lowest ongoing listing / reporting expenses

Moderately expensive process

Low marketing expenses

Relatively high expenses

Institutional as well as retail marketing costs

Investor Base Domestic institutions



– Non SEBI registered FIIs may participate through P notes

All existing shareholders of the company

Indian retail investors

Domestic institutions



Pricing At or around the prevailing market price


At or around the prevailing price At or around the prevailing price

Regulatory

Requirement

No formal approval required

Offering Circular to be submitted to the local stock exchanges

Offering Circular to be approved by SEBI

Offering Circular to be approved by SEBI

Liquidity Impact Immediate increase in liquidity in the domestic exchanges

Immediate increase in liquidity in the domestic exchanges

Immediate increase in liquidity in the domestic exchanges

Visibility Opportunity to re-position story with institutional investors

No significant change in visibility Opportunity to re-position story with retail and institutional investors

Dilution Dilution of existing shareholders No dilution of existing shareholders

Dilution of existing shareholders



Documents

Equity Financing Alternative