Recent Trends in Indian IPO Market


By

Shankaregouda
Lecturer-MBA
Bellary Engineering College
Bellary-583104
 


Abstract

IPOs witnessed a sharp decline in collections during the June 2008 quarter, indicating a fall of 88.45% from the year-ago levels. The data on number of IPOs that were issued are not encouraging either. The sentiment of the investors can be traced back to the overvalued Reliance Power IPO during Q4'07. This was an issue from the Ambani stable, which was the most high profile sufferer. Reliance Power ended its first day on the markets at Rs. 372 against issue price of Rs. 450, Millions lost money. The Sensex dropped 863 points in sympathy.

Subsequently, Wockhardt Hospital pulled out its Rs. 676 crore IPO due to under subscription and other business houses were also reluctant to move the primary market.

Introduction

The Indian primary market has come a long way particularly in the last decade after deregulation of the Indian economy in 1991-92. Both the primary and secondary markets have had their fair share of reforms, structural cum policy changes time to time. The most commendable being the dismantling of the Controller of Capital Issues (CCI) and introduction of the free pricing mechanism. This changed the whole facet of Initial Public Offering (IPO) market.

Initial Public Offering (IPO)

Initial Public Offerings (IPOs) or Initial Issues refers to Issue of shares for the first time to the public, either after incorporation or conversion of private limited company to public limited company. In other words, an offer by unlimited company to the public for the first time to get listed its securities in stock exchange.

Recent Trends

In the last quarter of FY 2007-08, several large equity offerings, including those from reputable business houses, have struggled to hit their targets. India's stock markets have been volatile, reacting to fears of a widening global credit crunch and fears of a U.S. recession. Let's have a glance of IPOs in the Indian primary market during Jan-March, 2008.

Table 1: IPOs during Jan-March 2008 in India

Period

IPOs

Numbers

Amount (Rs. In Crores)

January 2008

9

13,948

February 2008

4

1,893

March 2008

4

493

            (Source: www.epwrf.res.in/upload/Current_Statistics/c10830-13.xls -)

Fund raising by Indian companies has seen a sharp drop in the last quarter of financial year 2007-08. This is evident from an analysis of data presented in the above table.

Some Cases During Q4, 2007-08

The first casualty of the Indian IPO bubble was, on February 7, 2008, Wockhardt Hospital pulled out its Rs. 676 crore IPO. The price band of the book-built issue was lowered from Rs. 280-310 to Rs. 225-260. The last date for subscription was extended.

But qualified institutional buyers, including foreign investors, mutual funds and hedge funds, applied for only 0.06% of their quota in the Wockhardt issue. The non-institutional portion (mainly for high net-worth individuals or HNIs) was subscribed 0.0048 times. Even the retail part saw demand for barely more than half the pie. It was an unmitigated disaster and the first time in recent memory that an IPO from a respected business house has flopped in India.

Close on its heels, real estate company Emaar MGF, a joint venture between the Dubai-based Emaar group and MGF Development of New Delhi, also had to withdraw its IPO in the face of low demand. The Rs. 6,500 crore issue started with a price band of Rs. 610-690. It was brought down to Rs. 530-630 in two trenches. The last date of subscription was extended by three days, but to no avail.

The Bombay Stock Exchange Sensitive Index, Sensex, touched 21,207 on January 10, an all-time high. Barely a month later, on February 10, it fell to 16,608, a five-month low.

Wockhardt and Emaar MGF were bad enough for investor sentiment. But the overvalued Reliance Power IPO was the most high profile sufferer. This was an issue from the Ambani stable; word on the street is that the Ambanis have always made money for their investors. At Rs. 11,500 crore, it was India's largest-ever IPO.

The Reliance Power IPO was eventually oversubscribed 73 times and raised $190 billion. Some $100 billion of this came from foreign funds. This constitutes one-and-a-half times the total foreign institutional investor (FII) money coming into the country since 1992. "When Reliance Power lists early February, it will be among the 10 top listed companies in India," Anil Ambani, the younger son of Reliance founder the late Dhirubhai Ambani, told a press conference shortly after the IPO closed. "If we assume it lists at the issue price of Rs. 450, the market capitalization for the group will be around $100 billion."

It was not to be. Reliance Power ended its first day on the markets at Rs. 372, Millions lost money. The Sensex dropped 863 points in sympathy. The myth of Ambani invincibility was shaken. Clearly, it didn't help the Reliance Power IPO that the Sensex lost more than a fifth of its market capitalization between January and February 2008.

A Comparison of Q1'07 & Q1'08

Table 2:  IPOs during Q1'07 & Q1'08 in India:

Period

IPOs

Numbers

Amount (Rs. In Crores)

Q1'07

   

    April

4

703

    May

6

456

   June

10

11,914

Total

20

13,073

Q1'08

   

    April

1

14

    May

4

307

   June

8

1,572

Total

13

1,509

            (Source: www.epwrf.res.in/upload/Current_Statistics/c10822-13.xls)


IPOs witnessed a sharp decline in collections during the June 2008 quarter. Corporates raised just over Rs 1,509 crore from IPOs, indicating a fall of 88.45% from the year-ago levels. The data on number of IPOs that were issued are not encouraging either.

In contrast to 20 IPOs issues in the Q1'07, only 13 IPOs were floated in the June 2008 quarter. This is also the lowest number of IPOs hitting the primary market in any of the June quarters in the past four years.

Indian companies were also shy of raising money through the FPO route. Not a single FPO hit the market during the June 2008 quarter compared with two FPOs during the year-ago quarter. Poor investor response to primary issues and steeper valuations are major reasons why companies did not approach the market for the second time.

It is not only the number of IPOs and FPOs that have declined, but debt and private placement offers have also seen a steep fall. There were only 76 companies making private placement of debt vis-`a'-vis 147 in the June 2007 quarter. In terms of value, the collection through this route was 44% lower at Rs 14,095.6 crore.

Even though the picture was gloomy for IPOs, FPOs and private equity funds, there was a moderate growth in funds raised through rights issues during the June 2008 quarter. The two rights issues that were floated during the quarter collected Rs 438 crore, reflecting a 20% rise over the year-ago levels.  This is a welcome trend.

Acknowledgement:

Finally I wish to thank Dr. T.Thomas, Director, Dept. of Management Studies, Bellary Engineering College, Bellary 583104 for his encouragement in publishing this paper.
 


Shankaregouda
Lecturer-MBA
Bellary Engineering College
Bellary-583104
 

Source: E-mail October 1, 2008

           

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