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Money, where'd you come from?

Dec 5, 2008

In the previous article, we had discussed about how the financial turmoil has made the IPO market dry up. In this article, we will look at how the trend of capital raising from other sources has changed as well.

  • Also read - IPOs: Imaginary Profits Only?

    For a listed company, the different sources of raising capital include - IPOs, rights issues, private placements and overseas floatations. This can be further broken down into two - equity and debt. While IPOs and rights issues are methods of raising capital through equity, the other two components i.e. private placements and overseas floatations have a mixture of both, equity and debt.

    Stockmarkets: Total Floatations
    Source: CMIE
    The adjacent chart gives you an idea of how the trend has changed in the past two years. In the chart we have compared the total floatations (which includes IPOs, rights issues, private placements and overseas floatations) raised during 2007 and 2008 (till October).

    Apart from IPOs, which we had discussed in the previous article, we will now look at the other sources individually.
    Rights issues

    Source: CMIE
    When the markets were in their so called 'boom' period, the need for raising capital through rights issues was relatively less as it was easy for companies to raise capital from various sources. However, the market meltdown in the year till date has led to a number of rights issues being floated in the market this year. We can see from the adjacent chart that in February 2008, the rise was mainly due to SBI's rights issue (approximately Rs 167 bn). The spike in the month of September 2008 was mainly due to the rights issues of Hindalco (Rs 50.5 bn) and Tata Motors (Rs 41.5 bn).
    Private placements
    Source: CMIE
    A friend in need is a friend indeed. Private placements have continued to remain the companies' saviors throughout 2008. Although relatively lower to the latter half of 2007, capital raised through private placements has remained stable during the current year. However, there was a setback in private placements during mid 2008 due to the ongoing financial turmoil.
    Overseas floatations
    Source: CMIE
    "No money for me, no money for you". This line can easily sum up the scenario of capital raised from overseas market in 2008. Infact, in the month of October and August 2008, there was absolutely no capital raised due to the credit crunch that intensified post the demise of Lehman Brothers. And looking at the scenario across the global markets currently, there is a high possibility of this trend to continue in the medium term.

    Conclusion
    With liquidity crunch being the main threat, capital has become the need of the hour. With companies looking to fund their expansion plans or purely meet their working capital requirements, 2008 has been tough. Companies have been finding it difficult to raise capital from various sources. Those who have managed to raise capital through debt are facing the consequence by paying a high rate of interest. The governments across the world are going all out to ease liquidity by announcing various bailout packages. Thus, unless and until some benefits begin to trickle in and stability prevails in the financial markets, the going may be a little rough for corporates.

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