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IPOs: Signs of action - Views on News from Equitymaster
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  • Dec 12, 2001

    IPOs: Signs of action

    And the tables have turned, or so it seems at the current juncture. The primary markets is buzzing with activity off late with a number of companies lining up to take opportunity of the improvement in sentiment. But rights issues continue to dominate the scene. Action on the IPO front, on the other hand, continues to languish.

    If one were to look at the primary market pie over the last five years, it clearly reflects the trend in the market. The proportion of private placements and rights issues of the total IPO pie has seen a notable change in the last two years. Private placements have shown consistent upward trend for the last five years. One reason cited for this could be the fact that regulatory restrictions have been freed for mobilizing funds via private placements. Moreover, with the advent of venture capital funds, companies were able to raise money easily, which was not the case before. Moreover, uncertainty in the IPO market meant that more companies opted for private placement to fund their expansion and restructuring plans. Total money mobilised through private placement stood at Rs 360 bn in FY01, lower than Rs 423 bn clocked in FY00. But as a percentage of total issue proceeds from the primary market, it had touched 75% in FY01 (excluding the IMD inflows in October 2000 under overseas floatations).

  • Read about the trend in the IPO market

    The opening up of the economy has also posed new challenges to corporate India. Either they have the option of becoming more efficient or lose out to its competitors and shut shop. One reason for the rise in rights issues proceeds could be attributed to the aforesaid factors. As India incorporated accelerates its restructuring drive, rights issue proceeds are also expected to increase (Tata Engineering was the most recent high profile rights issue). We could also see some banking and financial institution rights issues in the coming years, as they gear up to comply with the capital adequacy norms and to fund their expansion plans (Dhanalakshmi Bank is the latest amongst the lot).

    The changing IPO pie…
    (% of total) FY97 FY98 FY99 FY00 FY01 FY01*
    Public issues 25.3% 26.0% 26.1% 24.4% 10.9% 16.9%
    Rights issues 5.6% 5.9% 2.7% 2.5% 2.2% 3.4%
    Private placement 60.7% 39.4% 67.6% 67.0% 48.7% 75.4%
    Overseas floatations 8.4% 28.7% 3.6% 6.2% 38.3% 4.3%
    Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
    Source: CMIE, *excluding IMD proceeds

    But public issues had virtually dried out in the last one-year. In FY00, money raised via public issues stood at Rs 154 bn. This when compared with Rs 81 bn in FY01 is lower by 47%. The reasons were obvious. When the tech boom fizzled out, it took confidence of the investors along with it. Even some of the high profile media companies were forced to rethink their IPO plans, not once but thrice, last year. Some have even shelved IPO plans and opted for the private placement route.

  • Read on how IPOs are performing

    The question is when would one see a revival in the IPO market? What is the trend one can possibly look at? Given the state of the economy, there is not much to cheer about for the markets, not in the near-term atleast. A number of telecom and media companies are expected to tap the primary market in the coming years. Bharti Televentures IPO, the first amongst them, has brought some cheer and a glimmer of hope in the market. Following Bharti, South Asian Petrochem had filed for a public issue and it is slated to open on December 20, 2001.

    But a word of caution for investors (Read our checklist for IPOs). The recent slowdown in the IPO market is just a passing phase. After all, we have had atleast three IPO booms in the last decade. India is a growing economy, and it will see a new breed of entrepreneurs who will dream and will need your money to achieve that. But given the sour taste of previous IPO booms one can only hope that this time around investors would be more prudent and not be taken in by the flavour of the month or the year.



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