'NCD,' 'ADR,' 'IPO' and Others Spell the Future for Indian Firms

In January, signs that funds might soon begin to flow again for corporate India showed up when Tata Capital went to the market to raise $100 million by issuing a non-convertible debenture (NCD) with an interest rate of 12%. (NCDs are basically unsecured loans with high interest rates. Unlike convertible debentures, they cannot be converted into company stock.) It was six times oversubscribed.

Since then, companies have begun employing what seems like an alphabet soup of fundraising tools, including American and global depository receipts (ADRs and GDRs), foreign currency convertible debentures (FCCBs) and qualified institutional placements (QIPs).

Even initial public offerings (IPOs), which many thought would never fly in the current economic environment, have reappeared. The market seems to be responding: In late June, timeshare company Mahindra Holidays and Resorts became the first IPO to be listed on the Indian bourses since July 2008. The IPO was eventually oversubscribed 9.8 times.

Despite optimistic signs in the fundraising environment, a looming tsunami threatens to drown any momentum: The Union Budget has projected a deficit of 6.8% of GDP in fiscal 2009-10. To finance this, the government will borrow around $80 billion from the market. "The government borrowing will put upward pressure on the interest rate," says Rajiv Kumar, director and chief executive of the Delhi-based Indian Council for Research on International Economic Relations. This could squeeze out the private sector.

Finance minister Pranab Mukherjee, however, is not worried. "The government borrowing will be managed in such a manner that there is no starving of the private sector," he told the media shortly after the budget was announced.

To read more about how Indian firms are raising funds, see “Indian Companies Ride New Waves of Fundraising” in the current issue of India Knowledge at Wharton.