Mumbai: The zero-premium initial public offering (IPO) may be back.
Mumbai-based Avon Weighing Systems Ltd, maker of platform scales and weighbridges, is the first firm this year to hit the market with an at-par IPO on 9 June. According to investment bankers, Avon could be the first of the firms to take this route and many more firms are likely to float their IPOs at par in a weak primary market.
Since 1992, when the Controller of Capital Issues, the predecessor of Securities and Exchange Board of India, or Sebi, allowed IPOs to be priced freely, companies have usually sold shares to the public at a premium.
Zero-premium public issues (Graphic)
“Pricing at par” has always been connected to the market situations, said Pankaj Jaju, who looks after IPO advisory at Enam Financial Consultants Pvt. Ltd. And, the weather on the bourses has turned inclement in the past months. In 2007, 105 IPOs raised more than Rs39,000 crore. However, in the first five months of 2008, only 24 IPOs hit the market, mopping up Rs17,421 crore.
Investors in the primary market will be able to buy Avon’s stock at its face value, or par value, of Rs10.
The last stock sold at par in Indian primary market was that of Saamya Biotech (India) Ltd, a Hyderabad-based biotech company, in October 2007.
A Mint analysis of IPOs in the past reveals that the “at par” IPOs, which was a common phenomenon until 2001, had faded during years that followed. In 2000, about Rs240 crore was raised from the market by 57 IPOs which were sold at par. In 2001, 10 IPOs priced at par raised Rs252 crore.
However, from 2002 onwards, there has been a drought of such IPOs.
The decision to price the issue at par, “was conscious”, according to Pankaj Suraiya, chairman and managing director of Avon.
Some big issues priced at huge premium are now trading below their IPO price, he said, adding, “Companies that tap capital markets should also give an opportunity for their investors to create wealth.”
Some investment bankers who manage IPOs, however, said that such pricing is inspired by the company’s track record apart from the market conditions.
Credit Analysis and Research Ltd, one of the four rating agencies registered with Sebi, has graded Avon’s IPO at 2/5, indicating “below average” fundamentals.
While “at-par” issues have been rare, several established firms have taken this path even after CCI relaxed the rule.
The November 2002 IPO of Kolkata-headquartered Allahabad Bank Ltd, one of the oldest banks in the country, was priced at par.
Four public sector banks in south India—Syndicate Bank Ltd (December 1999), Indian Overseas Bank (December 2000), Vijaya Bank Ltd (January 2001) and Andhra Bank Ltd (April 2001)—had also priced their issues at par.