The Indian primary market has come a long way particularly in the last decade after deregulation of the Indian economy in FY92. Both the primary and secondary markets have had their fair share of reforms, structural cum policy changes time to time. The most commendable being the dismantling of the Controller of Capital Issues (CCI) and introduction of the free pricing mechanism (which permits the companies to price the issues). This changed the whole facet of Initial Public Offering (IPO) market. Free pricing mechanism allowed good corporates to raise money from the primary market at the right price, which was denied earlier. However, the decontrol was, to some extent, misused by corporates to overprice issues.
The government realised the need for a regulated environment and started to promote its necessity in capital markets. Spearheading this was the establishment of The Securities and Exchange Board of India (SEBI) which became active in 1992. SEBI was assigned the role of monitoring and regulating the working of stockbrokers, bankers to an issue, merchant bankers, portfolio managers, and other intermediaries who are associated with stock markets. The effects of these structural changes are apparent from the trends in the resources raised from primary market, which includes public issues, rights issues, private placements and overseas issues.
The Primary market 'Cycle'
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It is evident that during 1992-94, the bourses started to show signs of recovery after the securities scam in FY92. The Sensex also touched a new high during the same period due to the improved economic environment. Though total funds mobilised during FY94 went up from Rs 135 bn in FY93 to Rs 188 bn in FY94, a number of companies started to cash in on the buoyant primary market, notably the finance companies. Besides, as the domestic companies went on for overseas issues (GDR, FCCBs and ECBs), there was a sharp increase in funds raised through overseas issues, which shot up by 959% from Rs 8 bn in FY93 to Rs 80 bn in FY94. The trend continued in 1995 backed by robust industrial production and higher gross domestic product growth. IPO market had another impressive year. Public issue proceeds moved up to Rs 249 bn, a growth of a 32% compared to FY94.
Buoyed by the business scenario most of the manufacturing companies went for huge capacity expansions and diversification. The impact of this was visible as excess capacity cramped margins and many companies went into the red. Public issues started drying up. The total fund mobilised during FY96 came down by 40% as the proceeds from public, rights and overseas issues fell by 27%, 47% and 67% respectively. That is the reason why both proceeds from private placement as well as overseas markets moved up sharply by 60% and 121% respectively in FY97. But, then came the South East Asian crises, which hit the trade and economic growth. So, FIIs shifted their portfolio, which resulted in reduced exposure towards developing economies like India. The market remained flat, as investors preferred to put money in banks rather than investing in shares.
But during the latter half of FY98, markets witnessed the boom in software stocks. Software stock valuations soared through the roof. This boom in the secondary market caught on to the primary market as well. More than 50% of new issues were from software companies in FY99. They received tremendous response from investors with over-subscription rates ranging anywhere between 20 times-55 times the issue size. Subsequently, these companies got listed at huge premiums to their offer price, which triggered interest among investors. The private placement market witnessed a surge in mobilisations. This was largely due to promoter’s shoring up their stakes in companies, in light of the takeover code taking a more concrete shape. Also, as the primary markets for both equity and debt turned bearish, companies opted for the low cost option of private placements.
Moreover, funds mobilised via overseas issues witnessed a 1,500% jump since Indian companies went for American Depository Receipts (ADR) issues, the first one being, Infosys. However, proceeds from private placements started to fall after SEBI announced new regulations. The total receipts via private placement fell by 28% in FY99.
Since inception, the role that market regulator SEBI has played in reforming primary market is commendable. Stringent norms have been imposed as and when required. Pre-issue requirements of issuing company and Lead Managers, filing due-diligence report at the time of filing of draft-prospectus and post-issue obligations of revealing the allotment basis are some of the regulatory measures, which were enacted to safeguard investors and to bring transparency in the system. Other notable norms include the lock-in period norms for promoters as well as mutual funds in the issuing company. Besides, project appraisal route as an alternative to the profit track record route was replaced by book-building route, where qualified institutional investors (QIBs) where allowed to subscribe 60% of the issue.
Though these measures did prevent the investors from fraudulent practices, the quality of new issues, however, seemed to be deteriorating. Companies with good track record, teams and institutional backing were overtaken by companies, which zoomed in to cash in on this new economy boom.
Though public issue receipts showed 10% YoY growth in FY00, funds mobilised from primary market remained flat (1%). The primary market moved in tandem with secondary markets. For instance, Television–18 got a tremendous response while public issue from Ajanta Pharma just managed to sail through. Further, established software companies preferred the private placement route for raising funds in FY00. As a result, proceeds from private placement showed a sharp rise of 60% to Rs 403 bn. For the second consecutive year, non-financial public sector undertakings and government companies remained absent from public issue market. Though private placement receipts fell during FY00, some bond issues received good response which include bond issue from Indian Oil Corporation and Hindustan Petroleum Corporation Limited.
The IPO market has come a long way since the boom of FY94. However lots has to be done since the market seems to be heading the same direction as it way during the early nineties when non-banking financial institutions tamed the primary market. Besides, recent statistics also indicate that the average size of public issues have shrinked to Rs 100 m in FY01. Added to the woe, only five issues in the first half of the current year managed to get more than 5 times over-subscription compared to 30 last year. This is expected to continue as long as unscrupulous companies who do not have any infrastructure facilities, manpower, revenue model, continue to raise money from the markets.
Nevertheless, the regulators role is commendable and it can be anticipated that the regulatory environment will only improve in the coming years.