Mumbai: The worldwide financial meltdown left another major casualty in 2008: the market where Indian companies had hoped to raise money by listing their shares on stock exchanges, also known as the “primary” market.
While a number of companies had to postpone initial public offerings (IPOs), others that went ahead with plans, including Delhi-based real estate developer Emaar MGF Land Ltd and Mumbai-based Wockhardt Hospitals Ltd had to shelve them amid investor apathy.
With many economies slowing and many stock markets producing their worst annual returns in a long time, it appears that 2009, or at least the early part of it, won’t offer any fresh hope as far as new IPOs are concerned.
Also see Capital Markets Review (Graphic)
“You require a stable and a buoyant secondary market (where listed shares are traded) for the primary market to happen. If the secondary market continues to be the way it is, then the primary market will not work,” said Prithvia Haldea, chairman and managing director of Prime Database, which tracks market data, including issues. His rationale is that when there are no buyers for existing listed stock, there will be no appetite for new stocks.
“The primary market will open up only once the secondary market stabilizes and that too with a lag,” said Sanjay Sharma, managing director and head of equity capital markets at Deutsche Equities India Pvt. Ltd, which was ranked No. 1 by Bloomberg in its 2008 so-called League Tables, a closely watched ranking of those who underwrite domestic, company equity issues, including IPOs and rights issues.
According to Sharma, secondary markets’ stability will depend on not just global events but three India-specific factors.
“Corporate earnings as estimated by research analysts (are) still uncertain and investors will wait for the December and March quarter numbers before being comfortable on valuations,” he said. “They will also wait to see what happens on the political front (referring to the impending general election) and on the recent geopolitical situation between India and Pakistan.”
The next step, he said, will be in convergence of valuation expectations of the issuer and investor, adding: “The investor needs to get a reasonable fix on the earnings as well, before he can decide on a price to pay.”
According to data from Bloomberg, 34 Indian companies raised Rs18,300 crore through IPOs in 2008. That is a 45.96% drop from the Rs33,800 crore raised from 89 IPOs in 2007. Of the Rs18,300 crore the IPO of Reliance Power Ltd, the Reliance-Anil Dhirubhai Ambani Group company in January alone accounted for Rs10,100 crore.
Qualified institutional placements, or QIPs, in which promoters of listed entities issue shares to institutional buyers without involving the retail investor, also suffered a setback in 2008. Funds raised by this route dropped 83.26% to Rs3,700 crore in 2008, compared with Rs22,100 crore in 2007, said Bloomberg.
While IPOs and QIPs lagged, rights issues became the most favoured route for promoters of companies to shore up capital. Funds mobilized through this method increased more than threefold to Rs29,500 crore in 2008 compared with Rs8,000 crore in 2007.
However, even those who raised funds adopting this route, including Tata Motors Ltd and Hindalco Industries Ltd, struggled to pull them through. “It’s not that there was a lack of issuers in 2008. Institutional investors took a bad hit and investible surpluses went down,” said Haldea.
In terms of products, the ones with lower time to market would be first to resume, as and when the secondary markets stabilize. IPOs could be relatively subdued even after this, considering that it takes approximately six weeks between price range fixation and listing, which is a long time in such volatile markets.
“The type of products that can fly will be those that can be done quickly, like QIPs, fast track follow on and rights offerings. We will also see some private placements with private equity players,” said Deutsche’s Sharma.
Some market observers are cautiously optimistic about 2009. Says A. Murugappan, executive director of ICICI Securities Ltd: “India will still show growth and, therefore, foreign investors will come back into India... I am cautiously optimistic that the primary market will improve in the coming year.”
A report from Nexgen Capitals Ltd, the investment banking arm of New Delhi-based financial services house, SMC Global, said merchant banking fees from all the IPOs in 2008 was just Rs230 crore, compared with Rs771 crore in 2007.
Graphic by Sandeep Bhatnagar / Mint