Thinking of investing in Indian stock market? What you need to know about current trends

Question: Globally, capital markets have seen fewer initial public offerings. What is the trend in India? Are the IPOs confined to large Indian companies?

ANSWER: Contrary to global trends, the IPO landscape in India has witnessed a surge, driven by strong economic activity and positive foreign and domestic investment sentiment. During the nine months ended on September 30, 2023, 149 IPOs were logged in India which includes large companies being listed on the main platform of stock exchanges and public offers by small and medium enterprises (SMEs). In the third quarter of this year, 21 IPOs were listed on the stock exchanges and the capital raised aggregated to $ 1.7 billion. During this quarter, the SME segment raised $166 million from 48 IPOs. This momentum is expected to continue in the current quarter of 2023. The success is attributed to Indian companies setting up robust governance systems and innovative models for growth.

Question: My family members in India want to set up a limited company to start a new manufacturing business. It is expected that a substantial amount will be raised by way of term loans from banks. I have been asked to join the company as a promoter director. Are there any risks in doing so?

ANSWER: If the company proposes to borrow substantial funds, the banks generally require the promoter directors to give their personal guarantee. This is fraught with the risk of your personal guarantee being invoked by banks in case there is a default by the company in repaying the loan on schedule at a later point of time. While the loan may be secured on the fixed assets of the company, banks will also proceed against the personal guarantors for recovery of their dues. Recently, the Supreme Court of India has upheld the provisions of the Insolvency & Bankruptcy Code whereby banks are permitted to invoke the personal guarantees of promoter directors when the company is facing insolvency proceedings under this law. There have been several instances where promoter directors who have given personal guarantees in respect of the loans taken by the company have faced the prospects of bankruptcy where the value of the assets of the company is insufficient to meet the dues of banks. Therefore, it would not be advisable to accept the position of a promoter director especially when you are not going to be involved in the management of the company.

H. P. Ranina is a practising lawyer, specializing in tax and exchange management laws of India.