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June 30, 2021

Banking deals snapshot: India’s private placement bumps along amid the pandemic

By Mohamed Dabo

Snapshot for week beginning 20 June. Over the years, privately placed debts have emerged as an important source of long-term financing for Indian corporates.

For many Indian firms, private placement is now a major alternative source of funds—to bank credit and loans from other financial institutions. In terms of value, private placements are second only to bank financing.

With the continuing global spread of the coronavirus, capital markets and stock exchanges in India, as well as abroad, have been experiencing significant turmoil.

At the same time, as a result of Covid-19, many issuers have experienced a material lessening of the demand for their products or services. They may otherwise be experiencing decreasing cash flows and/or liquidity issues, making it necessary to raise capital.

The unique confluence of adverse circumstances resulting from Covid-19 raises the question of what alternatives, outside of traditional equity offerings, may be available to raise capital during this time of global crisis.

The term “private placement” refers to the sale of securities to a small number of private investors to raise capital.

These private investors include mutual fund investors, banks, insurance companies and others.

Private placements are different from public issue since in the latter one the shares are sold in the open market to anyone willing to buy them whereas in private placements of shares – the shares are sold to specific investors.

Private placement in India

“In general, private placement is defined as issuance of securities to less than 50 persons,” according to the Reserve Bank of India, the country’s central bank.

Unlike a public offering, private placement is exempt from filing an offer document with the Securities and Exchange Board of India (SEBI) for its comments.

Further it may not involve any form of general announcement, general solicitation, advertising, any seminar or meeting whose attendees have been invited by a general solicitation or advertisement. Rules relating to private placement are framed under the Companies Act 2013.

Corporates access the private placement market because of its inherent advantages.

First, it is a cost and time-effective method of raising funds. Second, it can be structured to meet the needs of entrepreneurs and investors. Third, private placement does not require detailed compliance of formalities as required in a public issue.

Regulation of privately placed debt issues by public limited companies started after SEBI issued guidelines on September 30, 2003.

However, in view of the mushrooming growth of the market and the risk posed by it, SEBI further prescribed that the listing of all debt securities, irrespective of the mode of issuance, that is, whether issued on a private placement basis or through a public/rights issue, will be done through a separate listing agreement (SEBI 2004).

Since then, SEBI has revised its regulations from time to time.

Presently, issue of securities through private placement route are governed by SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (SEBI 2016).

Deal of the week: Mahindra Finance to raise $30.30m in private placement

Mahindra & Mahindra Financial Services (Mahindra Finance), an Indian non-banking finance company, has agreed to raise INR2.25bn ($30.30m) in a private placement redeemable non-convertible debentures (NCDs) due 2026.

The bonds will carry an interest rate of 6.35% per annnum. The date of allotment of bonds is June 24, 2021 and they are set to mature on June 24, 2026.

A meeting of the duly authorised committee was held on June 24, 2021, approving the allotment of 2,250 secured redeemable non-convertible debentures (NCDs), the company said in a regulatory filing.

The Covid-19 factor

The Covid-19 pandemic will have lasting unknown effects on businesses and has already caused delays and cancellations with respect to fundraising efforts and investment transactions planned or already in progress.

Although raising capital during a pandemic seems like an impossible task, there are investors and issuers that are carefully progressing through the process of pitching, conducting due diligence, negotiating terms, and even closing rounds of financing.

Issuers and investors fortunate enough to move forward on their transactions will have some additional considerations to mull over as they negotiate terms and determine an appropriate valuation for a company at a time when the global economy appears to be on the brink of collapse.

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