Indian companies rushed to float initial share sales this year but overall fundraising on the stock exchanges slumped due to market volatility and weak economic and investment scenarios.
Local firms raised about Rs 77,000 crore ($11.5 billion) in 2016 through public markets, down 40% from Rs 1.29 trillion last year, showed data from the Securities and Exchange Board of India and stock exchanges.
The data includes money raised through initial and follow-on offerings, rights and preferential issues, private placements and offers for sale. The data excludes IPOs and rights issues of small and medium enterprises, and overseas issuances.
IPOs and preferential allotment accounted for three-fourths of the total amount. Funds raised through IPOs touched a six-year high at almost Rs 26,500 crore, the data showed.
Ajay Saraf, executive director at ICICI Securities Ltd, was enthused by the activity in primary markets. The year saw issuances ranging across sizes and sectors such as technology, finance, healthcare and business services, he said.
“It has been a record year of IPO activity. IPOs did well, led by private equity exits,” Saraf said. “This augurs well for next year’s pipeline.”
Finance companies led the IPO charts this year. ICICI Prudential Life Insurance Co. Ltd, PNB Housing Finance Ltd, and small finance banks candidates Equitas Holdings Ltd and Ujjivan Financial Services Ltd were among those that floated IPOs.
Even e-commerce company Infibeam Incorporation Ltd tested the waters despite headwinds and valuation markdowns of privately held peers such as Flipkart by global investors.
Dharmesh Mehta, managing director and chief executive at Axis Capital Ltd, said investor response to IPOs this year has been positive. “Good companies with strong fundamentals and right pricing will draw investors even in difficult times,” he said.
Mehta expects 2017 to be better than the current year and said companies in the infrastructure sector need cash but are struggling with a huge debt pile and lack confidence.
Mehta’s explanation explains the slowdown in private placements, as a slow capital expenditure cycle of private companies curbed the need for money.
Data also indicates that the initial euphoria of the National Democratic Alliance’s victory in the 2014 general election seems to have waned, as fundraising via qualified institutional placements (QIP) has been declining for two years. Also, benchmark stock indexes are ending the year near the same levels as last year after falling 9% since touching the 2016 peak in September.
Investment bankers said the case is similar for companies going public. While the number of IPOs has surged, a majority involved an exit—either partial or complete—by existing shareholders, including private equity players, instead of raising fresh money for expansion.
Twenty of the 26 IPOs in 2016 included an offer for sale of shares by promoters and PE investors. The money raised from such offers accounted for more than two-thirds of the total IPO proceeds.
ICICI Prudential Life Insurance Co Ltd is one such example. Parent company ICICI Bank Ltd sold a 12.63% stake in the first public issue by an insurance company as well as the biggest IPO since Coal India Ltd’s offering six years ago.
“PE firms making money brings confidence,” said Jayasankar Venkataraman, senior executive director and head of equity capital markets at Kotak Mahindra Capital Co. Ltd. He added that PE exits will bring liquidity and that the IPO pipeline remains strong.
Indeed, several companies are in the queue to float IPOs. These include BSE Ltd, operator of Asia’s oldest stock exchange; National Stock of India Ltd, the country’s largest bourse; PE-backed Continental Warehousing, and the radio unit of Blackstone-backed Jagran Prakashan.
As for QIPs, fundraising through private placement was at its lowest levels since 2011. Indian firms raised Rs 4,552 crore compared with Rs 19,006 crore last year and Rs 32,632 crore in 2014.
A top executive with an American investment bank said Indian companies, especially in the metal and infrastructure sectors, need a large amount of fresh funds but investor sentiment is weak.
“That explains the slowdown in QIPs. The requirement of fresh funds is directly related to growth in the economy and overall consumption. All that remains slow for some time, especially after demonetisation,” the executive said, referring to the government’s 8 November decision to ban high-value notes, a move that has caused a cash crunch and slowed economic activity.
The executive said companies may start to raise funds from the second half of 2017.
Venkataraman of Kotak Mahindra agreed that growth needs to pick up and said that government spending could boost the economy. “The first three months of 2017 are crucial for the economy and markets,” he said. “The after-effects of demonetisation need to settle down.”
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