What is your take on the initial public offering (IPO) market scenario currently?
Everyone is concerned about the state of the IPO market, which has been very sluggish in the past three years. In the current financial year, expectations were very high, given the hope generated by the new government and a buoyant secondary market. Regrettably, the year is ending with just eight IPOs raising a meagre ₹ 2,700 crore. There are several factors responsible for this slow takeoff. For one, the revised Sebi (Securities and Exchange Board of India) eligibility norms have limited many potential issuers. Greater disclosures and higher due diligence by the investment bankers is taking much longer time. Fundamentally, the corporate sector has yet to start reporting better numbers and until that happens, the stories would be weak and hence also the valuations. Additionally, PE (private equity) firms who are looking at exits are looking for prices that the market is not willing to give.
One of the biggest demands of capital today is from the infrastructure sector. However, poor performance of the past IPOs from this sector as also uncertainty with regard to their future is a cause for investors’ apathy and, hence, this large capital raising exercise may not happen in the near future.
Recently, we had a couple of IPOs that just made it and the listing of one of them was not good. Only one IPO saw robust response. Why so?
The IPO market has not shown many success stories in the past four years; in fact, there have been very few and most have generated poor returns. It is also true that most IPOs have been small in size, which typically do not evince enough investors’ interest, and pricing has not enthused investors either. It is only when we will have a few success stories (great post-listing returns) that people would start looking at the IPO market seriously. On the other hand, investors continue to believe that there is still an upside available in the secondary market, where risks are relatively lower.
What do you think investors are looking for? What points do you think the promoters are missing on?
Investors are looking for great stories at a reasonable price, good corporate governance, and if possible, companies with a PE investor who is not fully exiting. As more IPO success stories happen, investors would be willing to pay higher prices. Promoters are missing on the changed market structure little demand for small companies, offering issues at prices that clearly appear interesting. Promoters who do not have a good track record or good corporate governance can forget the IPO market, at least for the time being.
Sebi is planning to make it easy for Indian start-ups to take the IPO route. What are your thoughts on this and do you think we will see many start-ups opting for listing in India? What are the key risks ?
I am impressed by Sebi’s dynamic approach to address this emerging phenomenon, and in addressing it swiftly. Today, we have a huge set of professionally managed promising new-age companies where there is no dominant promoter and where the object of the issue is not to finance a typical project (land, buildings, plant and machinery etc.). There was already a recognition by Sebi of companies needing funds for purposes other than projects and, therefore, a company could raise 25% of the issue amount for general corporate purposes. For the new-generation companies, Sebi is willing to look at 100% for such purposes. Also, instead of the promoters being required to offer a minimum 20% of post-issue capital as lock-in for a period of three years, it is considering lock-in of the entire pre-issue capital only for six months for all shareholders. To save retail investors from such companies which are perceived to be high-risk, the proposed platform will have two categories of investors—qualified institutional buyers (QIBs) and non-institutional investors (NIIs). To restrict retail investors, the minimum application size shall be ₹ 10 lakh (minimum trading lot ₹ 5 lakh). Finally, such companies will have the option to migrate to main board after one year.
Sebi is also pushing for more SME (small and medium enterprise) IPOs. How do these compare with those of start-ups? What could be the risks involved in SME IPOs?
There is huge difference between SMEs and so-called start-ups. Sebi’s proposed guidelines for start-ups is basically for new-generation companies, many of which are very large.
Coming specifically to SMEs, the entire SME sector is unlisted today (just about 100 companies have listed on the SME Exchange platform). Most SMEs have capital requirements and are finding it difficult to raise the same from private investors. A mature exchange platform enables them to raise capital from the market. The risks are being contained presently by not allowing retail investor to participate, by compulsory underwriting and by compulsory market-making.
In the new financial year, we may see a lot of IPOs and we will have government’s divestment programme, too. How do you foresee the responses to them?
The market and the sentiments continue to be bullish. If these continue, we may see many, but not a flurry of IPOs in the coming financial year. Many of these IPOs would be led by PE firms who are looking at an exit. My sense is that in companies where there is no initial exit or there is a partial exit by the PE firms, the response from investors would be very good, provided the valuations are perceived to be right. We could see interesting IPOs from the new-generation companies later in the year if Sebi notifies the alternate capital-raising platform guidelines soon.
Divestment has a big number in the coming year. If this is phased out properly, the pricing is right and in case the processes are improved, it would be easy enough to meet the target. This would become even simpler if the SUUTI-held stake is divested.
The appetite is almost infinite. Not only 2,000+ FIIs (foreign institutional investors), but a huge domestic institutional investor base and the untapped retail base is available for the asking. I have, of course, been a votary of changing the direction of divestments. While we moan the lack of retail investors, we are not using the opportunity to expand their base significantly. PSUs (public sector undertakings) represent strong companies. And a discount of 15% for retail would see unimaginable response; this is, of course, public wealth being shared by the public so there should be no qualms on the degree of discount.