The year 2011 witnessed a drastic change in India companies' fund raising patterns. The year came to be known more for cancellation of public issues worth Rs 320 bn versus those raised (worth just Rs 141 bn, less than half of those cancelled). The public issues that finally managed to hit the markets hardly took off with around 77% of them trading below their issue prices.
By the end of 2011, the market for public offerings (initial and follow-on offers) turned out to be a dampener reporting an average notional loss of 29% since listing. As equity markets dried up across segments - ranging from IPOs, FPOs, and QIPs to ADRs/GDRs, the domestic firms were left with no choice but to tap foreign debt markets for cheaper funds. Even the Foreign Currency Convertible Bonds (FCCBs) that are directly linked to equity markets could not tempt firms during the slowdown and External Commercial Borrowings (ECBs) emerged as the last resort. The funds raised through ECBs thus witnessed a 36% YoY increase, via 20% YoY jump in the number of such issues.
The overall capital (both from debt and equity markets) raised declined 40% year on year (YoY) in 2011, and the share of equity slipped to 13% in 2011 from 67% (of the total capital raised) in the previous year. The increase in the foreign debt was despite the tough conditions in European and American economy. It would have been fine had things stopped there.
Unfortunately, things took a nasty turn as the end of the year approached. The domestic market conditions worsened with companies staring at lower growth and muted profitability in the near term. The comfort of strong currency that fuelled the trend of raising money from abroad in the first half also vanished. Moreover, firms saddled with huge debt burden lost favour amongst equity investors.
Come 2012, we do not see an immediate resurgence in primary markets. There is hardly any catalyst that could turn around the situation, especially as long as the profit outlook remains muted. However, sound business models and attractive valuations may find some takers. Meanwhile if debt costs become more reasonable in domestic markets, companies may continue to resort to leverage to fund their capex plans.