With a downturn in business climate, a number of companies were suddenly caught on the wrong foot. The slowdown in demand hit them hard throwing their cash flows out of gear. In their struggle to service existing debt, they piled on further debt. At that time the capital markets in India were literally closed to these companies. However, the tide seems to be turning in India Inc.'s favor as we have a stable government at the center. The government in power is perceived as pro- reforms which will revive economy and business prospects of Indian companies. Such strong optimism has led to jump in valuations of companies' and therefore a spate of capital raising activities such as Qualified Institutional Placement (QIPs), block deals and offer for sale are expected.
As per a feature in Economic Times, a global investment bank has received mandates from seven Indian companies to raise at least US$2 bn through QIPs. This signals the start of the fund raising activity in the markets. But the markets have run up sharply and may witness a correction or the upside could be limited. However, the long term potential of investing in the Indian markets continues to remain robust. Therefore, a momentum in fresh capital issuance is likely to pick up sooner than later.
However, all said and done, we reiterate investors to perform due diligence before investing in equity issues as the pipeline of companies wanting to raise capital is very huge. This is because in a strong sentiment-based rally, more often than not the fundamentals are often ignored and investors find themselves trapped in poor quality stocks. Although sitting on the fence could be the last thing investors can do in such an interesting phase for the capital markets. Having said that the scenario is still not as aggressive as post-2009 when almost every investment bank had more than 5 mandates for raising money. In fact, the activity is moving at a slow pace and is largely towards reform dependent sectors such as power and infrastructure. Investors should still trade cautiously rather than investing blindly. This way investors can minimize chance of burning their fingers.
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