Capital better

The Indian firms traditionally strong in capital markets work are facing increased competition in a revved-up market from both domestic and international rivals, reports Kian Ganz

 Although capital markets work in India is not ­necessarily the most ­technical or profitable area, it nevertheless comes with major kudos and potential for relationship building. Once you float a company and do things right, it may very well turn into a firm’s client for life across all practice areas.

Coupled with the rise of the Indian stock markets and companies’ again ­undiminished appetite for fundraising, India’s capital markets sector has therefore turned into a battlefield for both domestic and foreign law firms. And the battle lines are shifting.

The return of capital markets

“It’s been a good year to have a presence in the Indian capital markets I think,” ­summarises DLA Piper Hong Kong-based capital markets head Stephen Peepels. “Like other companies in Asia, a lot of ­companies [in India] had to sit on the sidelines, but we were anticipating a resurgence in the ­market, and that’s happened.”

In the 2010 calendar year Indian equity capital markets raised $29bn (£17.66bn), growing by almost 30 per cent year-on-year, according to data provider Dealogic, while IPO values increased by a massive margin of 165 per cent to reach $10.6bn.

Qips on the radar

The other bread-and-butter work for law firms in equity capital markets are qualified institutional placements (Qips). These are a somewhat ­easier route to cash compared with an IPO, involving the placing of equity directly with sophisticated ­institutional investors. Qip fees tend to be lower than those of a fully fledged IPO.

“We love Qips because they have the potential to be done really quickly,” notes Peepels. “But there’s a thrill factor for the IPOs because the company’s diving into the market for the first time, whereas on Qip projects you tend to be just helping existing clients.”

Although Qip values dipped by around 24 per cent in 2010 compared with 2009’s ­values according to data from Bloomberg, most foreign firms did not complain. In the same period the total equity capital markets deal volumes decreased in the US by 8 per cent and in Europe, the Middle East and Africa by 35 per cent, according to ­Dealogic.

However, towards the end of the year Indian capital markets also faced a more testing time, with massive domestic ­corruption scandals having hit both the headlines and already jittery investors.

“There’s been a general decline in Indian capital markets activity in the past few months, primarily as a result of the ­volatility in the Indian stock indices,” explains Jones Day Singapore-based partner Manoj ­Bhargava. “We believe this volatility is in turn caused by a number of factors, such as high inflation, uncertainty in the Middle East, the recent corruption scandals and high oil and gas prices.”

Local hero

Several years ago the only firm in the ­Indian game was domestic corporate law ­powerhouse Amarchand Mangaldas, which boasted the greatest capital markets ­expertise and ­bandwidth.
“We continue to have the deepest and largest team across the country and are ­continuously focused on training to ensure that we’re delivering quality consistently on all our transactions,” insists Amarchand Mumbai managing partner Cyril Shroff. “Our team’s in a different league altogether.”

Few would dispute the core of the claim, as Amarchand filed almost twice as many IPO and Qip prospectuses in the 2010-11 financial year than its nearest rival, ­according to data compiled by Legally India (see table). The competition, though, is starting to make its presence felt.

The main contenders

Take Luthra & Luthra, for example. The firm started its capital markets practice from scratch in 2006 with Amarchand ­capital markets lateral Madhurima ­Mukherjee, but it now boasts the second-strongest capital markets practice by the number of IPO and Qip mandates over the past fiscal year.

“We’re making good progress, and slow and steady will win the race,” notes ­Mukherjee. “We’ve gained ground and we continue to chip away at the old block.”

Similarly, AZB & Partners, which was stuck firmly in the IPO-advising midfield in the previous financial year, has now forced its way into third place of the IPO league table following a strong strategic push into the sector. This comes despite its break-up with best-friend firm Clifford Chance at the beginning of the year; tellingly, the joint equity capital markets mandates between the firms during the best friendship were few and far between.

More than a dozen other domestic firms are also starting to carve up pieces of ­varying sizes for themselves.

Perceptually a bit of a game changer, and one of the most notable achievements for Luthra in 2010, was its win in the tender to act on the IPO of state-owned coal ­producer Coal India. This was India’s largest-ever public share issue, which ultimately raised Rs152bn (£2.07bn) in a hugely ­oversubscribed issue.

Luthra’s teammate on the successful pitch was the even younger newcomer DLA Piper – a firm that in the previous year had been next to nowhere on the capital markets radar, with only one IPO to its name.

The Luthra-DLA Piper combo also reprised their roles on a number of other pitches, such as the Indian government’s divestment of the smaller Engineers India.
How low can you go?

In both these cases aggressive pricing was key and in Engineers India the firms ­reportedly submitted a joint winning bid of Rs13.6m. Of that the majority would have gone DLA Piper’s way, but both firms are understood to have been operating at levels close to their pain thresholds, particularly on Coal India, where the pricing was even lower.

Similar low-ball bids won in other state-owned company IPOs, such as that of ­Hindustan Copper. Here Amarchand and Dorsey & Whitney won out in blind ­auctions with quotes of around Rs4.6m and Rs8m respectively.

Partly to blame is the Indian government’s method of selecting shortlisted law firms on a strict lowest-bid basis in order to increase transparency in the process; but the other factor is the sheer appetite many firms evince for winning the landmark ­marquee mandates.

“I think you can’t do it endlessly,” concedes Peepels about the comparatively low pricing that firms pitch on divestments. “But these are really important, [they’re] some of India’s most important industries.

“One of the reasons we’ve approached the government disinvestment transactions is that these transactions are highly demanding and incredibly time-pressured because the companies tend to be quite large. So my team’s really dug into these very big and complicated transactions and I think the training we’ve received is ­priceless. These are tough deals and you’re learning advanced issues.”

Peepels’ persons

The fact that DLA Piper has succeeded in building an Indian capital markets team from Hong Kong is intriguing. Peepels joined the firm in 2008 from Jones Day with a brief to build up the firm’s Asia ­capital markets practice. He says that in 2009 he made a strategic decision to target India specifically, due to his belief “that to be a credible player in capital markets in Asia you had to be active in India.

“While [Indian] capital markets were not very active up to March 2010,” he ­continues, “it gave me the opportunity to identify some really good legal talent, while other people may have been in a hiring freeze.

“I hired fairly aggressively within the team then, people all of whom had a couple of working years of experience in India [working at domestic law firms] but who wanted to practise at an international law firm.”

Some of the key hires include Biswajit Chatterjee, who joined in September 2008 from Allen & Overy, being promoted to partner in April this year, along with a ­number of mid-level and senior associates from Indian firms.

“It turns out that the timing worked out great,” Peepels says. “By the time we got busy I had the team in place and we made some efforts to meet the important ­investment banks, so it just went very well. We had a pretty deep edge ready to devote resources to those transactions.”

Around 10 corporate finance lawyers at DLA Piper Asia are now focused ­principally on Indian capital markets deals, Peepels reveals.

Price sensitive

However, pricing remains a challenge in India, particularly for international firms.

“I’d say Indian clients are among the most fee-sensitive clients across the region, and in some cases a little bit overly so,” notes ­Peepels. “It challenges law firms to think strategically – you need fees to allow yourself to be genuinely committed to a ­transaction.”

Its aggressive pricing strategy helped DLA Piper achieve the top of the IPO league table in the 2010-11 financial year with nine IPO mandates. The firm was runner-up in the Qip stakes, behind Jones Day.

Dorsey and Jones Day also lead the field in the IPOs stakes by a mile, while Ashurst, Clifford Chance, Linklaters, O’Melveny & Myers and White & Case are also making a comfortable – if by volume more modest – living in the IPO and Qip spaces.

Big issues

A third leg of Indian equity capital markets practices are rights issues to existing ­shareholders, although these attract a ­different audience. Only rarely is there is a need for an international law firm, or the fees to pay for one.

This means that a domestic counsel’s workload can be more than that of an IPO at a similar price.

Firms such as ALMT Legal, Crawford Bayley & Co and Khaitan & Co have ­managed to carve out a niche in this area, with each firm advising on four rights issues over the 2010-11 financial year.

While in the UK and at international firms most capital markets practices are firmly divided between debt and equity, in India debt fundraising is still somewhat of a novelty and firms’ second choice after ­equity. This is due to strict regulation and Indians’ somewhat culturally ingrained aversion to accruing debt, whether ­privately or for ­companies.

Only six domestic public bond issues took place in India over the 2010-11 financial year.

Corresponding with the lower volumes there are also few specialist debt capital markets lawyers around. Amarchand picked up mandates as sole counsel on three of the issues, while firms such as AZB, J Sagar Associates (JSA) and Wadia Ghandy & Co scored one apiece.

Amarchand Mumbai debt capital ­markets partner Niloufer Lam says that, although equity was still the first port of call, “to my mind at least there’s no doubt we’ll see much more of this market develop”.

By all accounts India’s capital markets have not finished growing in breadth and depth by a long shot, so more new arrivals and turf wars are to be expected. But beware – the arena is already far from empty.

Kian Ganz is editor of

(Click image below to view larger version)