Favourable capital markets and a strong pipeline of companies looking to go public are expected to keep the initial public offering (IPO) financing market vibrant during financial year 2017-18, according to rating agency ICRA.
The IPO financing market has been pegged at an average Rs 175-225 billion in recent public issuances. It rises to Rs 650-700 billion in the case of large issuances and those with high investor demand, ICRA noted in a report.
In IPO financing, high net-worth individuals (HNIs) borrow short-term capital from various avenues, barring banks, to fund their IPO applications. HNIs deploy a small fraction of their own capital—which is called margin money—upfront. Additional capital raised through short-tenure loans help HNIs or wealthy investors place large bids in an IPO.
The rise in the underlying secondary markets, which enhanced the performance of recent IPOs, has resulted in a steep increase in the median subscription of non-institutional investors that comprise HNIs and corporate houses. In FY2016-17, the median subscription of this category rose to 80 times compared with just two times in FY2015-16, the rating agency noted.
“The IPO financing market was vibrant in FY2016-17, supported by an increase in HNI investors’ interest in IPOs in a quest for listing gains. With banks not active in this segment due to regulatory restrictions, the field is dominated by non-banking financial company (NBFC) arms of some of the leading players in the capital markets and wealth management businesses,” said Karthik Srinivasan, senior VP and group head - financial sector ratings, ICRA.
IPO market activity has been the best so far this year compared with the last six years as companies look to benefit from the recent surge in stock markets. The 30-share benchmark Sensex rose to a record high on Thursday, closing at 31,369.34.
Thirteen companies have raised around Rs 12,000 crore so far this calendar year, extending the good run for IPOs after a blockbuster 2016 when fundraising by companies via initial share sales jumped to a six-year high of Rs 26,500 crore, data from the Securities and Exchange Board of India (SEBI) showed.
Primary market activity in India picked up pace after four years of slow activity till mid-2014 when the BJP-led government took over. In 2015, 21 companies had raised about Rs 14,000 crore, as per stock-exchange data.
Most companies that have floated an IPO this year— including securities depository firm CDSL Ltd, private equity-backed AU Small Finance Bank Ltd, stock-exchange operator BSE Ltd, hypermarket chain operator Avenue Supermarts Ltd, publishing firm S Chand & Co and Shankara Building Products Ltd—have received a strong investor response to their share sales.
These IPOs made strong debuts on the stock markets, with shares rising to 30-100% on the opening day.
ICRA’s analysis covering the period from April 2016 to June 2017 showed that shares of 24 of 31 companies that went public listed at a premium. The median listing gain was 14%. As a result, HNI investors earned positive returns in only 11 of the issuances during the period after factoring in interest expenses.