• JUNE 22, 2001

IPOs: Turbulent times

The primary markets seem to have completely dried out of gas. Though we saw a series of Initial Public Offering (IPOs) in the first two months of the current year (i.e. January and February 2001), for May 2001, total IPO proceeds were nil. The sentiment in the primary markets has been certainly dented. Not only from the investor's point of view but also from the company's perspective.

Declining proceeds…
(Rs bn) Public PPL*
May-00 3.0 32.4
Jun-00 2.9 49.3
Jul-00 10.7 42.0
Aug-00 10.5 22.3
Sep-00 12.3 42.7
Oct-00 7.1 11.0
Nov-00 10.4 21.9
Dec-00 4.3 35.2
Jan-01 0.1 34.4
Feb-01 13.9 16.4
Mar-01 5.0 30.6
Apr-01 0.2 6.4
May-01 - 17.2
Total 80.4 361.7
* private placement
There was a time when newspapers and magazines carried articles on the number of media companies who had their IPO plans with an average issue size of not less than Rs 750 m. Now all the companies are hoping that the sentiment in the secondary market would revive sooner or later, which would enable them to tap the market to fund their ambitious broadband plans. Though one cannot say that their plans have fizzled out, this holds true for their IPO plans.

Though both the primary as well as the secondary markets showed signs of recovery in the month of February 2001 in expectations of a decent budget and recovery in the markets, the recent scam took the wind out of their sails.

To support this argument, total funds mobilised from the primary markets through IPOs went up to touch Rs 13.9 bn in February 2001. This is the highest since May 2000, when the markets were dwindling due to the tech meltdown. However, after the unearthing of the scam, IPOs have virtually dried out.

Both IPOs and private placements have fallen by 93.4% and 54.2% respectively for the period ended April 2001 to May 2001 compared to the corresponding period of the previous year. However, money mobilised from rights issue has fallen by 'just' 25% during the same period. Alok Industries, Tata Finance and Varun Shipping Corporation were few of the companies who opted for rights issue.

(Rs bn) Public PPL Rights Issues
Apr 01-May 01 0.2 23.6 0.5
Apr 00-May 00 3.7 51.5 0.7
Change (%)-93.4%-54.2%-25.0%

Definetely, the damp sentiment in the secondary markets has had concurrent effect on the primary market. Apart from that, there could be other factors, which could also have resulted in a fall in aggregate issue proceeds. For example, two cash reserve ratio cuts effected by the Reserve Bank of India in February 2001 and May 2001 have increased liquidity in the banking system. Already there are arguments that there is enough liquidity in the banking system and more interest rate cuts are not needed. If one were to view from the other angle, aggregate bank credit for the last two months has shown negative trends. So to draw a parallel to this argument, companies could be stalling their IPO plans so as to keep their debt-equity ratios intact. This is supported by the fact that private placements have also registered a 54.2% decline between April 2001 and May 2001. The slow down in the economy may have resulted in companies postponing their expansion plans for which the incremental funds are required.

So the IPO markets could continue to remain lull in absence of any positive trigger to boost sentiment in the secondary markets. The likely triggers could be a normal monsoon, recovery in the economy and thus a revival in the sentiment in primary markets. But right now, the IPO market is facing its toughest times.

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